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Domestic
demand growth robust but slowing
National retails sales rose 7.5% in August over the same month last year.
The August figure was well below the 12.0% observed the prior month and
represented the end of a streak of double-digit expansions observed since
March. Rising interest rates are a key factor behind the slowdown.
According to the São Paulo Retail Federation (Fecomercio, Federação do
Comércio do Estado de São Paulo) more recent data indicate that retail
sales rose 4.2% in real terms in September over the same month last year,
which was down from the 4.9% reading in August and confirmed the slowdown
observed the prior month when growth decelerated from a robust 13.6% in
July. The quick spike in interest rates is likely to be the main
driver behind the current rapid slowdown in private consumption.
Nevertheless, consumer confidence continues to increase. The joint
survey by the Fundação Getúlio Vargas (FGV) and Fecomercio indicates
that consumer confidence rose 6.2% in September over the previous month,
from 121.3 in August to 128.8, on a scale between 0 and 200, where 100
indicates the dividing line between pessimism and optimism. The
September reading was well above the 2.2% increase observed the prior
month and confirmed the trend of continually improving confidence levels
observed since June.
Investment
remains robust but higher interest rates likely to prompt deceleration
Investment growth remains on a healthy growth trajectory. According
to IBGE figures, output of capital goods in industry was up 32.3% in
August over the same period last year, which represented an improvement
compared to the 25.0% pick-up observed in the previous month. The
August figure continued the double-digit expansion in capital goods output
observed since September last year. A month-on-month comparison
confirms the robust growth in capital goods output, as activity rose 2.28%
in August over the prior month in seasonally adjusted terms, which more
than double the 1.10% observed in July. More recent trade data also
indicate that investment continued at a healthy pace through October but
that growth slowed, as capital goods imports were up 4.0% over the same
month last year. The October figure was below the 14.0% pace
observed the prior month.
Outlook
upgrades persist as growth likely to slow at end of year only
Consensus Forecast participants expect gross domestic product (GDP) to
have expanded 4.6% in the third quarter. However, higher rates are
likely to prompt a moderation in activity in the final quarter, as growth
is seen as decelerating to 4.0%. Consensus Forecast participants
have hiked the forecast for full-year growth, by 0.2 percentage points to
4.5% from last month’s forecast. Thus, this month’s Consensus
Forecast is well above of the government’s 3.5% estimate. However,
the increase in inflation, prompted by higher fuel prices and robust
economic activity, is likely to prompt the Central Bank to raise interest
rates further. As a result, growth is likely to slow to 3.5% in
2005, which is unchanged from last month’s Consensus Forecast figure.
Consumer
prices remain above target
In October, the consumer price index (IBGE-IPCA 15), which covers monthly
price increases up to the 15th of every month, increased 0.32%. The
October figure was below the 0.49% increase observed in the prior month.
Lower prices for food, alcohol fuel and gas accounted for the moderation
in the October reading. In contrast, higher telephone tariffs and
electric energy costs provided some upward pressure. The October
price increase lowered the annual inflation rate from 6.9% in September to
6.6% in October. As a result, the annual inflation is well above the
Central Bank’s 5.5% inflation target for this year. Consensus
Forecast participants expect the acceleration in economic activity and
rising fuel prices to feed through to higher inflation this year. As
a result, year-end inflation is anticipated to reach 7.3%. This
month’s figure is unchanged over last month’s Consensus Forecast
estimate. Thus, the likelihood that monetary authorities overshoot
the target for the fourth consecutive year is high. Nevertheless,
this month’s forecast is still within the +/- 2.5% tolerance margin set
by the Central Bank. Panellists also anticipate that monetary
authorities will overshoot the annual inflation target next year, as the
5.9% Consensus Forecast estimate was marked up 0.1 percentage points and
is within the +/- 2.5% range around the central target of 4.5% set for
2005.
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