|
Economic growth slows
as interest rates rise
The robust growth observed in the first three quarters of last year
appears to have begun moderating in the final quarter. In October,
economic output in São Paulo grew 4.7% over the same month in 2003, as
measured by the monthly indicator of economic activity (IMEC, Indicador de
Movimentação Econômica) from the Economic Research Institute (FIPE,
Fundação Instituto de Pesquisas Econômicas). The October figure
represented a deceleration compared to the 6.8% expansion observed in the
previous month.
Domestic demand moderating
Private consumption is showing clear signs of moderation from the strong
activity in previous months. National retail sales rose a healthy 8.5% in
October over the same month the prior year. However, the October reading
was well below the 9.2% reading observed the prior month and continued the
trend of decelerating activity observed since July 2004. Similarly, more
recent data confirm the slowdown in consumption activity. The São Paulo
Retail Federation (Fecomercio, Federação do Comércio do Estado de São
Paulo) reports that retail sales in São Paulo dropped 0.2% in November
over the same month last year, which was down from the already subdued
0.5% growth observed in October and represented the first year-on-year
contraction observed since September 2003. Declining unemployment has
offset a more pronounced slowdown in private consumption activity,
provoked by rising interest rates. In November, unemployment reached
10.6%, 1.6 percentage points below the rate observed in the same period
2003 and only a notch above the 10.5% registered in the prior month.
Moreover, consumer confidence remains sound. The Fecomercio consumer
confidence index rose 2.2% in November over the previous month, from 142.5
in October to 145.6, on a scale between 0 and 200, where 100 marks the
line between pessimism and optimism.
Investment activity decelerating but trend not
established
Investment activity seems to have moderated notably in October,
as industrial production of capital goods rose just 0.2% over the same
month last year. The October reading was well below the robust 15.1%
expansion observed the prior month and represented the lowest growth rate
observed since August 2003. A month-on-month comparison confirms the
decline in activity, as output dropped 1.27% in seasonally adjusted terms
in October over the prior month. More recent trade data, however, do not
sustain a clear trend towards a continued decline in investment activity.
In November, capital goods imports were up 28.1% over the same month last
year, following on a 10.0% contraction in the prior month.
Outlook unchanged despite changed environment
Despite signs of a slowdown in the final quarter, Consensus
Forecast participants estimate the expansion in gross domestic product (GDP)
to have decelerated only moderately to 4.4% growth from the 4.9% expansion
in the third quarter. As a result, annual growth is anticipated to have
reached 4.8% in 2004, which is up a 0.1 percentage point from last month’s
estimate. Nevertheless, higher interest rates are likely to have begun
taking their toll on the domestic economy, where activity is seen slowing
to 3.7% in the first quarter and further to 3.2% in the second quarter. In
the second half of the year, growth is anticipated to begin accelerating
again to lift the annual expansion to 3.6%, which is also up 0.1
percentage point from last month’s figure. The current Consensus Forecast
is well below the official government budget estimate of 4.0%.
Consumer prices remain above target
In December, the consumer price index (IBGE-IPCA 15), which
covers monthly price increases up to the 15th of every month, increased
0.84%. The December figure was ahead of the 0.63% increase observed in the
prior month. Higher gasoline and alcohol-fuel and urban bus transportation
prices accounted for the pickup in December. The mid-December price
increase raised the annual inflation rate from 6.6% in November to 7.5% in
December. As a result, the annual inflation is likely to have remained
well above the Central Bank’s 5.5% inflation target for 2004 and even
slightly exceeded the year-end annual inflation rate of 7.3% expected by
Consensus Forecast participants. Thus, monetary authorities are likely to
have overshot the annual inflation target for the fourth consecutive year.
Nevertheless, the actual figure is likely to have remained within the +/-
2.5% tolerance margin. Panellists also anticipate that monetary
authorities will overshoot the annual inflation target yet again this year.
Consensus Forecast participants see the annual figure at 5.8%, which is
unchanged over last month and within the +/- 2.5% range around the central
target of 4.5% set for 2005.
Central Bank tightens again as inflationary
concerns linger
Responding to rising inflationary pressures, the Central Bank
decided to raise the benchmark SELIC interest rate on 15 December. The
December interest rate hike from 17.25% to 17.75% represented the fourth
consecutive monetary tightening and has brought rates up 175 basis points
from their August levels. Moreover, the Central Bank has not ruled out
further tightening in January if current price pressures should persist.
Nevertheless, a persistence of currency stability and a moderation in
economic activity should help contain prices.
Exchange rate appreciation trend persists
In December, the currency appreciated 3.2% in nominal terms
over the prior month to reach 2.65 reais to the US$. The December
appreciation followed on a 4.6% strengthening in November. As a result,
the nominal annual appreciation in the currency reached 8.8%. Last year’s
strengthening reflected a generalized international investor appetite for
emerging market assets, which also served to bolster the exchange rates of
other countries in the region. Furthermore, progress on economic policy
reforms by the current administration helped boost the currency and, more
recently, the weakening of the US$ in international markets has provided
an additional impetus behind the reais’ rebound. This year, Consensus
Forecast participants anticipate the current appreciation trend to
reverse, as the currency is expected to depreciate at a nominal 11.3% to
close the year at 2.99 reais to the US$.
Trade surplus surges to record high driven by
exports
Healthy international demand for Brazilian exports drove up the
trade surplus to a record high last year. Exports grew 32.0% in 2004 to
reach US$ 96.5 billion. Last year’s export growth represented a strong
acceleration from the already robust 21.1% expansion observed in 2003.
Imports grew at a lesser 30.0%, amid the strong pickup in domestic demand.
As a result, total imports reached US$ 62.8 billion and the trade balance
registered a surplus of US$ 33.7 billion, which was ahead of the US$ 32.6
billion expected in last month’s Consensus Forecast and exceeded the US$
24.8 billion surplus of 2003. This year, export growth is expected to
moderate from the unsustainable pace observed last year to 4.3%. Imports,
however, are anticipated to maintain a strong expansion trajectory of
15.1%. As a result, the trade surplus is expected to narrow to US$ 27.6
billion this year.
|
