Brazil - Economic Briefing May 2004

Economy on Slow Recovery Path but Favourable Monetary Setting to Help

Economic growth is only gradually rebounding from last year’s recession, as domestic demand is picking up below potential.  High unemployment remains the key impediment to more accelerated private consumption growth, while export-oriented industrial production is being curtailed by the stronger exchange rate.  Lower interest rates and rising real incomes are likely to bolster a pickup in consumption and exports will be favoured by increased prospects for currency depreciation and the ongoing recovery in global demand.

Unemployment on upward trend in first quarter
Unemployment reached 12.8% in March, which was up from 12.0% registered in the previous month and represented the third consecutive monthly increase in the jobless rate.  The government claims that the spike reflects seasonal factors and that unemployment is likely to drop in the coming months.  In fact, the number of new job seekers typically rises notably at this time of the year following the entry into the labour market of newly graduated university students and the end of seasonal hiring related to the holidays at the beginning of the year.  However, the March figure was 0.7 percentage points above the figure for the same month last year.  Furthermore, the annual average unemployment rate, which smoothes out monthly volatilities, rose a full percentage point over March 2003 to 12.6%. 

Private consumption lagging despite lower interest rates and stronger exchange rate
The lack of a more pronounced improvement in employment is preventing a broad-based rebound in private consumption activity.  According to the Brazilian Supermarket Association (ABRAS, Associação Brasileira de Supermercados), real national supermarket sales were down 3.7% in March over the same month last year, which represented a deterioration compared to the 2.3% year-on-year drop observed in February.  Similarly, the National Association of Automotive Vehicle Producers (ANFAVEA, Associação Nacional dos Fabricantes de Veículos Automotores) reports that automobile sales rose just 2.0% in February compared to the same month last year, which was down from the robust 14.8% growth registered in the prior month.  Furthermore, annualized automobile sales were down 7.0% in February compared to the same month last year.  Nevertheless, the most recent national retail sales data from the National Statistical Institute (IBGE) indicate that the volume of retail sales rose 5.1% in February over the same month last year, which represented the third consecutive increase but was below the 6.0% growth observed in the prior month.  Nevertheless, prospects for a rebound in private consumption are good given that interest rates are anticipated to decline further this year and that real wages have been rising steadily since November of last year.

Industrial production slowing despite global demand recovery and declining interest rates
Industrial production rose 1.8% in February over the same month last year, which was down notably from the 4.6% and 3.7% expansions observed in December and January respectively.  The low February figure in part reflects the fact that the Carnival holidays occurred in February this year.  As a result, February accounted for two working days less than February last year.  However, in seasonally adjusted terms, industrial output actually contracted 1.8% over the previous month - the third consecutive drop.  In February, industry was dragged down by strong contractions in tobacco, pharmaceuticals and clothing output, which were only partially offset by a strong production pickup in electronic/communications and office/computer equipment.  However, firms continued to take advantage of lower interest rates to step up investment activities, as capital goods output was up 10.4% in February over the same month last year, down from the 15.7% in the prior month.  Intermediate goods production expanded at a much more moderate 4.3%, while consumer goods output actually dropped 2.0% - the first decline since November 2003.

Outlook remains favourable amid lower inflation prospects and declining interest rates
Despite indications that economic growth lost some steam in the first quarter of this year, the current outlook for a pick-up this year remains favourable.  Prospects for continued moderation in inflation are good and should provide the Central Bank with further leeway to reduce interest rates, which should prompt businesses and consumers to step up their economic activities.  Furthermore, the current pickup in global demand and rising commodity prices are likely to benefit the export sector and will further drive economic growth.  Consensus Forecast participants believe that gross domestic product (GDP) will expand 3.6% this year.  Furthermore, the pace of economic activity is anticipated to moderate only a notch next year with the economy seen growing 3.5%, down 0.1 percentage point from last month.