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Robust domestic demand rebound moderating
In January, national retail sales rose 6.2% over the same month
last year, well below the 11.4% observed the prior month. Strong declines
in household goods and supermarket sales, which were down 25.8% and 25.6%
respectively over January 2004 accounted for the deceleration in overall
retail sales. The only sector where sales remained on a strong growth path
was office equipment, which rose 19.6% over the same month the prior year.
Despite the deceleration observed in January, the upward trend in the
overall retail sales activity remained intact. The annual average growth
rate inched upward from 9.2% in December to 9.3% in January. However, the
current trend is likely to draw to an end soon. According to more recent
data from the São Paulo Retail Federation (Fecomercio, Federação do
Comércio do Estado de São Paulo), retail sales rose 2.1% in February over
the same month the previous year, less than half the 5.1% expansion
observed in January. While the retail sales in the automobile sector
remained very robust, furniture and supermarket sales experienced strong
declines. Furthermore, consumer confidence waned in March amid initial
indications that economic activity may be slowing. The joint survey by the
Fundação Getúlio Vargas (FGV) and Fecomercio indicates that consumer
confidence dropped from 147.3 in February to 146.4 in March, on a scale
between 0 and 200, where 100 indicates the dividing line between pessimism
and optimism.
Investment remains robust despite higher rates
The higher interest rate setting is beginning to take its toll
on investment activities. According to figures from the National
Statistical Institute (IBGE), output of capital goods in industry was up
just 1.1% in February over the same period last year, only a fraction of
the 6.8% pick-up observed in the previous month. Seasonally adjusted data
confirm the deceleration, as capital goods output actually dropped 3.11%
over January, when production had declined 1.49%. Nevertheless, more
recent trade data indicate that investment may have recovered moderately
in March, as capital goods imports were up 20.4% over the same month last
year. The March figure was only moderately below the 22.4% reading
registered the prior month.
Outlook upgrade amid healthy rebound
Initial data show that economic activity did not decelerate as
rapidly in the first quarter as the strong successive hikes in interest
rates would have foreshadowed. In fact, Consensus Forecast participants
estimate that gross domestic product (GDP) accelerated to a 3.6% pace in
the first quarter over the same quarter last year. Nevertheless, higher
interest rates and rising fuel prices are likely to subdue consumption and
thus sustain the deceleration for the remainder of the year. For the full
year, economic growth is anticipated to reach 3.8% this year, which is up
0.1 percentage point from last month’s estimate. This month’s Consensus
Forecast figure is below the Central Bank’s estimate of a 4.0% expansion.
Consumer prices continue on upward trend
In March, the consumer price index increased 0.62%. The March
reading was ahead of the 0.59% increase observed in the prior month. A
strong spike in transportation prices, which rose 1.3% in March, was the
key driver behind the March figure. On the downside, declines in health,
personal and food prices helped moderate price increases notably. As a
result of the slightly higher March increase in consumer prices, the
annual inflation rose to 7.5% from 7.4% in February. The current annual
inflation figure remains well ahead of the Central Bank’s 4.5% inflation
target for but is still within the +/- 2.5% tolerance margin. Consensus
Forecast participants expect monetary authorities to overshoot the central
inflation target again this year with annual inflation expected to reach
5.9% by the end of the year, which is up 0.2 percentage points from last
month’s figure. Moreover, panellists anticipate that the Central Bank will
also overshoot the inflation target of 3.5% for next year with consumer
prices expected to increase 5.1%.
Central Bank tightens further amid lingering
inflation concerns
Following its monthly monetary policy meeting on 15 March, the
Central Bank decided to raise the benchmark SELIC interest rate by 50
basis points to 19.25%. The March move represented the seventh consecutive
month that the Central Bank has tightened monetary policy. As a result,
the benchmark interest rate is now at the highest level observed in
eighteen months. Given the current inflation rate, real interest rates
exceed 10% and in fact are among the highest in the world. However,
authorities justified their decision with concerns about continued strong
growth and high oil prices. Consensus Forecast participants believe that
officials will cut interest rates this year. As a result, the SELIC rate
is seen dropping to 16.9% by the end of this year, which is up 0.5
percentage points from last month’s forecast. Lower inflation next year
should enable monetary authorities to reduce the SELIC rate further to
14.8%.
Government decides not to renew agreement with
IMF
The government decided to let the US$ 41.9 billion stand-by
agreement with the International Monetary Fund (IMF) expire on 31 March.
The accord dated back to 1998, when the country was forced to resort to
multilateral support in lieu of an emerging market crisis resulting from
the Russian default to bolster its fledgling currency and international
reserves levels. The government has not drawn on the funds available under
the agreement since September 2003 and is confident that the healthy state
of the economy and sound economic policies no longer warrant further IMF
support.
Lula reshuffles cabinet in an effort to shore up
legislative support for pending reforms
On 22 March, President Lula reshuffled his cabinet. The
decision follows on the government’s defeat in the legislature’s vote for
a new president of the Assembly in February, where the governing Worker’s
Party (PT, Partido dos Trabalhadores) candidate Luiz Eduardo Greenhalgh
lost to Severino Cavalcanti of the smaller Progressive Party (PP, Partido
Progresista). The cabinet reshuffle underlines the government’s desire to
keep legislative support to pass pending pension and tax reforms, which
officials hope to pass before the 2006 presidential poll. Romero Luca, an
experienced politician and senator from the Brazilian Democratic Movement
Party (PMDB, Partido do Movemento Democrático Brasileiro), assumed the
post of Social Security Minister. Paulo Bernardo Silva, a legislator from
the ruling PT, assumed the portfolio of Planning and Budget Minister. The
cabinet reorganization was anticipated to be more far reaching. However,
President Lula continues to enjoy high popularity, which is likely to have
encouraged the president to undertake a more modest reshuffle. According
to the most recent March 2005 CNI/Ibope survey, 39% of Brazilians approve
of the government, which was down moderately from the 41% in December last
year but represented a clear improvement when compared to the 34% approval
rating in the same month last year. |
