Brazil - Economic Briefing October 2004

Economic Recovery Broadening (continued)

Growth outlook improves amid continued healthy economic setting
Consensus Forecast participants have factored the recent upward surprises in reported economic growth into their estimates for this year.  Even though the expansion is likely to moderate in the second half of the year, GDP is seen growing at a robust 4.3% in the third and 3.8% in the fourth quarter.  Activity is likely to moderate principally in response to rising interest rates.  Nevertheless, full year growth is seen to reach 4.3%, which is up 0.2 percentage points from last month’s forecast and is now well above the government’s more conservative 3.8% estimate.  However, the current Consensus Forecast figure is virtually on target with the Central Bank’s revised growth estimate of 4.4% (up from 3.5% earlier) from 30 September.  Next year, economic growth is expected to moderate to 3.5%, which is unchanged from last month’s forecast and remains less optimistic than the official 4.0% government projection.

Exchange rate appreciation trend persists
In September, the currency appreciated 3.2% in nominal terms over the prior month to reach 2.86 reais to the US$.  The September appreciation followed on a 2.7% and 2.6% strengthening in July and August respectively.  At its current level the currency is now 1.1% stronger than at the end of last year.  The strengthening reflects a generalized international investor appetite for emerging market assets that has also served to bolster the currencies of neighbouring countries.  However, the improved economic policy setting and heightened investor interest have served to bolster the currency further.  Consensus Forecast participants expect the current appreciation trend to reverse, as the currency is seen depreciating at a nominal 6.1% from its current level to close the year at 3.04 reais to the US$.  Next year, the real is anticipated to depreciate nominally at a lesser pace than this year – 4.9% - to reach 3.20 reais to the US$.

Inflation concerns mount amid strong economic setting
In September, consumer prices rose 0.33%, which was down from the 0.69% increase observed the previous month.  Declining food and a lower energy prices accounted for the more modest reading in September.  As a result, the annual inflation rate declined from 7.2% in August to 6.7%.  At its current level, the inflation rate remains above the 5.5% central inflation target set by the Central Bank for this year.  Furthermore, at the end of September monetary authorities voiced concerns that the heightened economic activity is likely to drive inflation upward further in the coming months.  As a result, the Central Bank hiked its own inflation estimate to 7.2% from 6.4% earlier.  The current monetary authority forecast is on the upper end of the current tolerance margin of +/-2.5% around the central target.  Consensus Forecast participants share the concern of rising price pressures, as annual inflation is expected to reach 7.3% this year.   Next year, inflation is also anticipated to remain above the Central Bank’s target of 4.5% (also with a +/-2.5% tolerance margin), as the Consensus Forecast figure for annual inflation is 5.8%, which is a notch above the Central Bank’s own 5.6% forecast.

Central Bank tightens reins amid rising inflation
Responding to rising inflationary pressures amid the strong economic setting, the Central Bank decided to raise the benchmark SELIC interest rate on 15 September.  Monetary authorities raised the SELIC rate for the first time in nineteen months – from 16.0% to 16.25%.  The Central Bank has not ruled out further tightening this year if pressures should persist.  Nevertheless, Consensus Forecast panellists expect the SELIC rate to remain at its current level through the end of the year.  This month’s Consensus Forecast figure is up 50 basis points from last month, as participants confide increasingly in the Central Bank’s commitment to monetary discipline amid the rising inflationary setting.  Similarly, next year’s Consensus Forecast estimate has experienced a notable upward revision from 14.3% to 14.9%.