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Signs
of incipient recovery emerging
According
to the Economic Research Institute (FIPE, Fundação Instituto de
Pesquisas Econômicas), economic activity in São Paulo, as measured by
the monthly indicator of economic activity (IMEC, Indicador de Movimentação
Econômica), rose 0.1% in October over the same month in 2002. This
was a notable improvement from the 3.85% experienced in the prior month
and represented the first positive growth rate observed since December
2001. Furthermore, the key consumption related indicator of the IMEC,
experienced a 4.5% boost in October over the same month in 2002 – up
from a 6.0% contraction observed in September – as rising real incomes
and declining interest rates raise domestic demand. However,
according to the São Paulo Retailers Federation (Fecomércio, Federação
do Comércio do Estado de São Paulo), retail sales did not exhibit any
improvement in October, experiencing a 10.4% decline over the same month
in 2002, which was a moderate improvement only from the 12.9% drop
observed in September for the same period.
Industrial
production, on the other hand, is showing more promising signs of an
emerging rebound. In October, industrial output rose 1.1% over the
same month in 2002, which was down from the 4.1% pickup in September but
represented the second consecutive monthly increase in production.
The majority of the sub-sectors in industry entered positive growth
territory with only pharmaceutical, beverages and plastics output
remaining deep in negative territory. Wood output and electrical
equipment production experienced the strongest boost in output. More
importantly, industrial production data point toward continued strong
growth in investment activities. October data show that output of
capital goods in industry rose a robust 6.9% over the same month last year,
which was down from the 8.6% growth the previous month.
Furthermore, according to trade data, capital goods imports rose a healthy
10.8% in November over the same month last year.
Consensus
Forecast participants expect economic growth to have entered positive
growth territory in the final quarter of the year with activity rising
1.3% over the same quarter in 2002. However, given the strong
contractions in economic activity in the second and third quarter of last
year, the economy is anticipated to have only narrowly escaped an annual
decline in output in 2002, as participants see growth to have reach 0.3%.
The current declining interest rate setting, the improved credit
environment and a stronger exchange rate will help bolster domestic demand
this year. As a result economic activity should accelerate, with
growth seen at 3.5%, unchanged from last month’s Consensus Forecast.
The current Consensus figure is below the 4.0% 2004 budget estimate for
this year but is on target with the Central Bank projection.
Fiscal
balances on target as legislature approves 2004 budget
In
November, the fiscal accounts registered an accumulated consolidated
primary surplus of 70.3 billion reais. The November figure brought
the accumulated primary surplus to 4.9% of GDP, which exceeds the
government’s target agreed to with the International Monetary Fund
(IMF). On 23 December, the legislature approved the 2004 budget
proposal. The government’s budget sets total spending, including
social security outlays, of 1.5 trillion reais (US$ 503 billion).
The budget provides for a consolidated public sector primary surplus to be
4.3% of GDP in 2004, which is unchanged from the planned figure for 2003.
The macroeconomic assumptions are somewhat more optimistic than the
current Consensus, particularly in terms of growth, interest rate and
inflation estimates for this year, which is reflected in differing
estimates for the non-financial fiscal deficit, which the Consensus
Forecast sees at 3.0% of GDP, compared to the government’s 2.3% of GDP
estimate.
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