Brazil - Economic Briefing August 2004

Growth Accelerates Rapidly but Inflation Concerns Overshadow Sustainability

Economic activity continues to accelerate, as the strong pickup in global demand is now being accompanied by a notable acceleration in the domestic economy.  However, inflationary expectations are rising and, rather than implement further interest rate cuts, the Central Bank could decide to tighten monetary policy.

Domestic demand rebound accelerates
National retails sales were up 10.0% in May over the same month last year.  The May figure was virtually unchanged compared to the 10.1% observed the prior month and sustained the trend of double-digit expansions observed since March.  The strong expansion in sales of office equipment (+35.6% year-on-year) and print publications (+19.7% yoy) was the key driver behind the robust May reading, as household goods and supermarket purchases experienced contractions.  More recent data from the São Paulo Retail Federation (Fecomercio, Federação do Comércio do Estado de São Paulo) indicate that retail sales rose 12.7% in real terms in June over the same month last year, which represented a noteworthy improvement compared to the already strong 5.8% reading in May.  Improved credit conditions are one of the key drivers behind the current rapid expansion in private consumption.  According to the Central Bank, private sector loan operations with individuals were up 22.2% in June over the same month last year, which was even slightly better than the strong 21.8% expansion observed the prior month and confirmed the rapid acceleration observed since October last year.  Consumer confidence is improving also as economic growth picks up.  The joint survey by the Fundação Getúlio Vargas (FGV) and Fecomercio indicates that consumer confidence rose 0.9% in July over the previous month, from 117.7 in June to 118.7, on a scale between 0 and 200, where 100 indicates the dividing line between pessimism and optimism.

Investment experiencing strong rebound amid lower rate setting
Businesses are taking advantage of the lower interest rate setting to step up investment activities.  Private sector loan operations in the rural and retail sector rose a vigorous 24.8% and 21.3% respectively in June over the same month last year.  The higher credit activity was mirrored by a similar rapid expansion in investment activity.  According to IBGE figures, output of capital goods in industry was up 32.8% in June over the same period last year, which represented an improvement compared to the 28.2% pick-up observed in the previous month.  The May figure continued the double-digit expansion in capital goods output observed since September last year.  More recent trade data also indicate that investment continued at a healthy pace in July, as capital goods imports were up 18.3% over the same month last year.  The July figure was well below the unsustainable 40.3% pace observed the prior month.

Outlook upgrade amid healthy rebound
Consensus Forecast participants expect the economy to continue along a healthy growth trajectory this year.  However, rising inflationary expectations, fuelled by higher fuel prices, may forestall further Central Bank easing for the time being and will hinder the economy from experiencing an even more pronounced economic expansion.  Consensus Forecast panellists have raised their gross domestic product (GDP) growth estimate for this year by 0.1 percentage points to 3.7%, which is above the government’s 3.5% estimate.  The healthier economic growth pace is seen as carrying over to next year, when GDP is expected to expand by 3.5%, which is also up 0.1 percentage point from last month’s forecast.