Brazil - Economic Briefing November 2004

Government Scores Victory in Nationwide Municipal Elections

Even though the government lost the elections in two key cities, São Paulo and Porto Alegre, the overall result was a clear endorsement of the ruling party.  The strong economic rebound observed this year and success in economic reforms clearly favoured the Lula administration.  The outcome of the municipal elections provides the president with renewed political capital and enables the administration to advance on remaining economic reforms.

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.