Brazil - Economic Briefing June 2004

Economic Activity Picks up but Uncertainty Over Strength of Recovery

The economy is on a clear recovery path from last year’s recession, as the strong rise in global demand bolsters the external sector.  On the domestic side, investment and consumption alike benefit from the favourable monetary setting.  However, the recent exchange rate depreciation, if sustained, and the high oil price may thwart further Central Bank easing for the time being.

Economy rebounds in first quarter
According to the National Statistical Office (IBGE), gross domestic product (GDP) expanded 2.7% in the first quarter of this year compared to the same quarter in 2003.  The first quarter figure exceeded Consensus Forecast expectations, which had economic activity picking up at a lesser 2.3% pace and followed on a 0.1% contraction in activity in the fourth quarter of last year.  Seasonally adjusted data confirm the strong first quarter rebound, as activity picked up 1.6% over the final quarter of 2003.  The first quarter figure was above the already healthy 1.4% seasonally adjusted expansion in the fourth quarter of last year.

Exports bolster activity as domestic demand recovery gradual
Healthy exports were the key force behind the first quarter economic rebound.  Exports rose a very strong 19.3% over the first quarter last year, which was up from the already robust 10.1% annual expansion observed in the previous quarter.  Imports registered more moderate but solid growth of 11.7% for the same period.  In addition, domestic demand recovered from the 1.1% contraction observed in the final quarter last year, with an expansion of 1.5% over the first quarter 2003.  Investment experienced a strong rebound; expanding 2.2% following on the 5.0% contraction registered in the fourth quarter.  Consumption also exited recession albeit on a more moderate scale, as activity reverted from a 0.2% recession in the fourth quarter to a 1.3% expansion in the first quarter.

Agriculture and transportation drive economic rebound
Growth was strongest in transportation and agriculture, where activity rose 7.4% and 6.4% respectively over the same quarter last year.  Agriculture expanded 6.4% following on 4.8% growth in the fourth quarter, as the sector benefited notably from a good harvest, particularly for soy and rice, but also from the increases in international commodity prices, amid the continued pickup in global demand, which has driven up exports of these products.  Transportation added 7.4% (Q4: +1.5% yoy), as particularly air travel and cargo transport are benefiting from the recovery in global economic activity.  Manufacturing also experienced a strong acceleration in activity, as growth rose from just 0.4% in the fourth quarter of last year to 6.0% in the first quarter.  On the downside, mineral extraction and construction activity declined 3.9% and 2.3% respectively when compared to the same quarter last year.

Outlook unchanged despite stronger first quarter
Consensus Forecast participants have adjusted their growth estimate for this year downward by 0.1 percentage points from last month, despite improved prospects for recovery.  Economic activity is expected to grow 3.5%, which is on target with the government’s 3.5% forecast.  The lowering of the benchmark interest rate by the Central Bank to levels not observed since April 2001 and easing credit conditions are likely to provide further impetus to the current economic rebound.  However, rising oil prices and further pronounced currency depreciation could raise inflationary expectations and curtail additional Central Bank easing.  As a result, domestic demand may recover at a less pronounced pace.  Next year, Consensus Forecast participants anticipate that growth will decelerate only very modestly to 3.4%, which is 0.1 percentage points from last month’s forecast.