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The economic rebound that has been driven
principally by the external sector so far is now also extending to the
domestic side of the economy. Consumption
and investment alike are recovering strongly, as businesses and consumers
take advantage of lower interest rates.
The pick up in activity, however, is also raising inflationary
expectations, which has prompted the Central Bank to tighten monetary
policy. |
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Lula’s
party holds firm in municipal elections
The Workers’ Party (PT, Partido dos Trabalhadores) of President Luiz
Inacio Lula da Silva scored an important victory in nationwide municipal
elections held on 3 October. According to results, the PT won 389
municipalities, doubling the number of municipalities it governs from the
187 garnered in the 2000 elections. Furthermore, the President’s
party took six of the 26 state capitals in the first round and will have
its candidates stand in the run-off elections of another nine this coming
31 October. The election results have strengthened the President’s
position and should help provide the needed momentum for the government to
advance on important pending economic reforms of the bankruptcy law,
Central Bank autonomy and private investment in public infrastructure
projects.
Economic
activity gains speed
On 30 September, the National Statistical Institute (IBGE) released final
gross domestic product (GDP) figures for the second quarter of the year,
which confirmed the previously reported 5.7% expansion observed in the
second quarter over the same quarter in 2003. The robust growth
observed in the second quarter is likely to have carried over into the
third.
Industrial
activity proceeds along healthy growth trajectory
Industrial production increased 9.6% in July over the same month last year.
Despite the strong reading, the July figure was actually below the
vigorous 13.0% increase observed in the prior month. Nevertheless,
the year-on-year variation in the moving annual average of industrial
output rose from 3.9% in June to 5.0% in July. Robust output growth
in the tobacco industry (+171.0% year-on-year), office and computer
equipment (+43.1% yoy) as well as automotive vehicles (+39.4% yoy) was the
key driver behind the strong July reading. On the downside,
pharmaceuticals, publishing/print and oil refining experienced declines in
activity.
Investment
driving domestic demand
Industrial production also suggests that the investment boom is likely to
have persisted into the third quarter, as capital goods output rose 23.9%
in July over the same month last year. The July figure was below the
33.4% growth pace of the prior month but represented the eleventh
consecutive monthly double-digit expansion. Intermediate and
consumer goods also experienced strong growth, expanding 9.9% and 7.5%
respectively over July 2003. The most recent trade data
indicate that strong investment growth has persisted through the end of
the third quarter. In September, capital goods imports grew 15.0%
over the same month last year. The September figure was down from
the 48.5% growth spurt observed in August but represented the seventh
consecutive month of double-digit growth.
Private
consumption also remains robust
Private consumption appears to have remained on a healthy growth track
going into the third quarter. National retail sales rose 12.0% in
July over the same month last year, following on 12.9% growth observed the
prior month. Strong growth in office equipment (+32.2% yoy) and
pharmacy sales (+10.8% yoy) accounted for the lion share of the July
expansion. The decline in unemployment (11.4% in July from 11.7% in
June), rising real incomes and lower interest rates continue to bolster
consumption. Moreover, consumer confidence remains high, despite the
increased likelihood that the Central Bank will raise interest rates in
the coming months. The joint survey of the Fundação Getúlio
Vargas (FGV) and Fecomercio indicates that consumer confidence in São
Paulo rose 2.2% in August over the previous month, from 118.7 in July to
121.3, on a scale between 0 and 200, where 100 is the line between
pessimism and optimism.
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