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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.
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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.
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