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Private
consumption remains healthy
The most
recent data from the São Paulo Retail Federation (Fecomercio, Federação
do Comércio do Estado de São Paulo) indicate that retail sales rose
5.0% in December over the same month last year, which represented a
noteworthy improvement compared to the 0.2% decline in November. Improved
credit conditions and rising real incomes were key drivers behind the
rapid expansion in private consumption. According to the Central Bank,
private sector loan operations with individuals were up 35.3% in December
over the same month last year, which was even better than the strong 33.2%
expansion observed the prior month and confirmed the rapid acceleration
observed since October 2003. Furthermore, the National Statistical
Institute (IBGE) reports that average real incomes of employed
persons were up 1.9% in December year-on-year. Consumer confidence also
remains robust. The joint survey by the Fundação Getúlio Vargas (FGV)
and Fecomercio indicates that consumer confidence rose 3.3% in
January over the previous month, from 141.4 in December to 145.7, on a
scale between 0 and 200, where 100 indicates the dividing line between
pessimism and optimism.
Unemployment on downward trend
Unemployment dropped to 9.6% in December, which was down a full percentage
point from the level registered in the previous month and 1.3 percentage
points below the same month the prior year. The annual average
unemployment, which smoothes out monthly volatilities, confirms the
improvement, as unemployment dropped 0.8 percentage points compared to
December 2003 to 11.5%. In the coming month, unemployment rate is likely
to rise since the number of new job seekers typically increases following
the entry into the labour market of newly graduated university students
and the end of seasonal hiring related to the holidays in the first two
months of the year. Nevertheless, Consensus Forecast participants
anticipate that unemployment will decline again and should reach 10._% by
year-end.
Resilience
of investment prompted by stronger demand
Trade data
indicate that investment activity continues to grow at a pronounced pace.
Capital goods imports were up 34.4% in January over the same month last
year. The January figure was ahead of the already robust 33.1% growth
figure observed the prior month and represented the third consecutive
double-digit increase.
Economy on
track in São Paulo
According
to the Economic Research Institute (FIPE,
Fundação
Instituto de Pesquisas Econômicas),
economic output in São Paulo rose 5.6% in December over the same month in
2003, as measured by the monthly indicator of economic activity (IMEC,
Indicador de Movimentação Econômica). The December figure represented
a moderation when compared to the 5.9% expansion observed in the previous
month. The year-end moderation is reflected in the annual average growth
rate of economic activity, which dropped 0.4 percentage point from 5.8% in
November to 5.4% in December.
Higher
interest rates likely to prompt slowdown
Final data
for last year indicate that the pace of economic activity is likely to
have slowed only moderately from the robust pace observed throughout the
first three quarters of the year. However Consensus Forecast participants
expect gross domestic production (GDP) to have grown 4.4% in the fourth
quarter, which represents a pronounced deceleration compared to the 6.1%
pace of the prior quarter. Nevertheless, annual growth is seen to have
reached 5.0%, which is up 0.2 percentage points from last month’s
Consensus Forecast figure. This year, tighter monetary policy of recent
months is likely to prompt moderation the pace of economic growth, which
is anticipated to reach 3.7%.
Consumer
prices continue on upward trend
In January,
the consumer price index (IBGE-IPCA 15), which covers monthly price
increases up to the 15th of every month, increased 0.68%. The January
reading was below the 0.84% increase observed in the prior month. Rising
food and fuel prices accounted for the strong January reading. Despite
the higher monthly increase, the annual inflation rate remained unchanged
at 7.5% in January. Moreover, annual inflation is well above the Central
Bank’s 4.5% inflation target for this year. Consensus Forecast
participants expect the deceleration in economic activity to help lower
inflation this year. As a result, annual inflation is anticipated to drop
to 5.7%. This month’s figure was revised downward by 0.1 percentage
points over last month and is within the +/- 2.5% tolerance margin set by
the Central Bank around its central target rate. Panellists also
anticipate that monetary authorities will overshoot the annual inflation
target next year but the 5.0% Consensus Forecast estimate within the +/-
2.5% range around the central target of 3.5% set for 2006.
Central
Bank raises rates for fifth consecutive month
Following
its monthly monetary policy meeting on 19 January, the Central Bank
decided to raise the benchmark SELIC interest rate 50 basis points to
18.25%. The January move represented the fifth consecutive month that
monetary authorities have decided to raise interest rates. The robust
pace of economic activity and high oil prices are considered key risk
factors for the current inflation scenario. Consensus Forecast
participants believe that inflationary pressures will ease throughout this
year, which should enable monetary officials to cut interest rates. As a
result, the SELIC rate is seen dropping to 16.4% by the end of this year.
Lower inflation next year should enable monetary authorities to lower the
SELIC rate further to 14.5%.
Currency
strengthening persist despite intervention
In January,
the currency closed at 2.62 reais to the US$, which represented a
1.1% nominal appreciation versus the US$ over the prior month, down from
the prior month’s 3.2% appreciation. The currency appreciation has
endured virtually uninterrupted for eight consecutive months despite
efforts of the Central Bank to curb the strengthening by intervening in
the foreign exchange markets. The key factor driving the recent
appreciation is the continued weakness of the US$ in international
markets. Consensus Forecast participants expect the current strengthening
trend to reverse this year with the exchange rate anticipated to close at
2.92 reais to the US$ - a 9.0% nominal annual depreciation. In
2006, the currency is expected to depreciate at a lesser 4.1% pace to
reach 3.04 reais to the US$ by year-end. |
