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Industrial
production continues to moderate amid higher interest rate setting
Industrial
production rose a meagre 1.7% in March over the same month last year. The
March figure was well below the 4.3% increase observed in the prior month
and continued the deceleration in output observed since December. Output
declines in the tobacco industry (-22.7% year-on-year), oil and alcohol
refining (+4.1% yoy) as well as publishing and print (+3.6% yoy) were the
key drivers behind the weaker March reading. A month-on-month comparison
does not confirm the deceleration in industrial activity, as seasonally
adjusted production rose 1.53% over February. Nevertheless, the upward
trend in output that was in place since February last year came to a
halt. In fact, the year-on-year variation in the moving annual average of
industrial output dropped from 8.6% in February to 7.6% in March.
Consensus Forecast participants expect further moderation in industrial
production this year with output expected to slow to a 4.9% growth pace,
which is down 0.3 percentage points from last month’s Consensus Forecast
figure.
Private
consumption remains robust but confidence declining from high levels
Private
consumption appears to have remained on a healthy growth track in the
first quarter. According to the São Paulo Retail Federation (Fecomercio,
Federação do Comércio do Estado de São Paulo) retail sales rose 14.7%
in March over the same month last year, which represented a noteworthy
improvement compared to the paltry 2.1% growth observed the prior month.
Strong growth in vehicle (+46.0% year-on-year), autopart (+36.1% yoy) and
clothing (+22.1% yoy) sales accounted for the lion share of the March
expansion. As a result of the healthy March reading, retail sales for the
first quarter rose 6.6%. The steady decline in unemployment, rising real
incomes and improved credit conditions are key factors behind the current
consumption surge. However, consumer confidence is dropping, as concerns
about rising interest rates loom. The joint survey of the Fundação
Getúlio Vargas (FGV) and Fecomercio indicates that consumer
confidence in São Paulo fell 3.0% in April over the previous month,
from 146.4 in March to 142.0, on a scale between 0 and 200, where 100 is
the line between pessimism and optimism.
Investment
growth moderates but remains firm
Industrial
production also suggests that the investment boom is likely to have abated
in the first quarter, as capital goods output rose 2.5% in over the same
quarter last year. The first quarter figure was below the 6.9% growth
pace of the prior quarter. Intermediate and consumer goods also
experienced moderation in growth rate, expanding 1.5% and 6.9%
respectively over the first quarter last year. Nevertheless, more recent
trade data do not provide clear evidence of the investment deceleration.
In April, capital goods imports grew 20.7% over the same month last year.
The April figure was up from the 20.4% growth observed in March and
temporarily put a halt to the decline in moderation in output observed
since January.
Growth to
moderate but remain healthy
Consensus
Forecast participants expect economic growth to have moderated in the
first quarter of the year, despite signs that export growth remained
strong and domestic demand did not slow as quickly as would have been
expected given the strong hike in interest rates implemented by the
Central Bank in the past several months. According to Consensus Forecast
participants, the rhythm of growth is anticipated to remain steady
throughout the year with gross domestic product (GDP) growing 3.7%, which
is still below the Central Bank’s estimate of a 4.0% expansion and a notch
below last month’s Consensus Forecast figure. Next year, the pace of
economic activity is expected to remain healthy with growth reaching 3.7%.
Central
Bank tightens further amid lingering inflation concerns
At the
monthly monetary policy meeting on 20 April, the Central Bank raised the
benchmark SELIC interest rate by 25 basis points to 19.50%. The April
hike was the eighth consecutive monetary tightening and brought the SELIC
interest rate to the highest level registered since September 2003. The
Central Bank continues to tighten despite the fact that real interest
rates exceed 10% and are now among the highest in the world.
Nevertheless, monetary officials justified the rate hike with concerns
about continued inflationary pressures emerging from rising utility and
oil prices. Consensus Forecast participants anticipate that interest
rates will come down this year, as the SELIC interest rate should decline
to 17.1%, which is unchanged from last month’s forecast. Moderating
inflation next year will enable the Central Bank to reduce interest rates
further according to Consensus Forecast participants, who see the SELIC
interest rate declining to 14.9%, up a notch from last month’s Consensus
Forecast estimate.
Current
account surplus widens amid strong export performance
The current account balance registered a surplus of US$ 2.7
billion in the first quarter of this year. The surplus was well ahead of
the US$ 2.0 billion surplus observed in the final quarter of last year and
also exceeded the US$ 1.6 billion surplus observed in the first quarter
last year. The substantial improvement in the current account reflects a
substantial widening of the trade surplus from US$ 6.1 billion in the
first quarter 2004 to US$ 8.3 billion in the first quarter this year.
Despite the stronger currency, exports rose 25.7% in the first quarter
over the same quarter last year. Strong domestic demand lifted import
growth to a strong but lesser 21.2% pace for the same period. The first
quarter current account figure raised the annual current account surplus
to US$ 12.7 billion (2.0% of GDP), which stood in contrast to the US$ 5.6
billion deficit in the first quarter last year (1.1% of GDP). The strong
performance in the export sector has prompted participants to undertake
notable revisions compared to the May Consensus Forecast current account
estimate. As such, the current account surplus for this year is now seen
to reach US$ 7.1 billion, which is up from last month’s US$ 6.1 billion
Consensus Forecast figure. Next year, the current account surplus is
anticipated to narrow significantly to US$ 2.2 billion, amid a further
slowdown in export growth.
Strong
export growth and moderating import demand lift trade surplus to historic
high
In April,
the trade balance surplus reached US$ 3.8 billion, which was up from the
US$ 3.3 billion surplus registered in March. The strong April reading was
the result of robust growth in exports, which rose 39.6% over the same
month last year to reach US$ 9.2 billion. Imports grew at a lesser but
very strong 15.0% for the same period. Healthy export sales of
semi-manufactured industrialized products and primary goods were the key
driver behind the strong export boost in April. Primary goods exports
benefited principally from healthy increases in commodity prices,
particularly for sugar and coffee, while fuels and steel helped bolster
semi-manufactured exports. Capital and consumer goods accounted for the
boost to import growth, whereas intermediate and primary goods imports
experienced a more moderate pick up. The April surplus figure raised the
annual trade surplus to US$ 37.8 billion, which was the highest trade
balance surplus observed ever. The moderation in economic activity this
year is likely to ease any upward pressure on imports. However, slowdown
in export growth is likely to be more pronounced amid the downturn in
global demand. As a result, Consensus Forecast participants expect the
trade surplus to narrow and close the year at US$ 31.1 billion. The
moderation in export growth will persist next year and the trade surplus
is anticipated to narrow further to US$ 25.5 billion.
Currency
continues strengthening despite intervention
In April,
the currency appreciated a nominal 5.3% versus the US$ over the prior
month. The April strengthening was the strongest monthly appreciation
observed in two years and brought the currency to an exchange rate of 2.53
reais to the US$. Continued US$ weakness in international currency
markets and record export receipts remain key factors behind the continued
strength in the real. In April, the currency continued a trend of
virtually unabated appreciation that began in 2003 and has persisted
despite Central Bank and government intervention. The most recent Central
Bank data for March show that monetary authorities bought US$ 3.96 billion
in the foreign currency market to stem the currency strengthening. Since
the end of last year through April, international reserves have increased
US$ 8.7 billion to reach US$ 61.6 billion. In addition to the Central
Bank, the government has announced that it is studying possibilities to
compensate exporters for the strong currency. Consensus Forecast
participants, however, do not expect the current trend to persist, as the
currency is anticipated to depreciate 10.1% from its current level to
reach 2.81 reais to the US$ by year-end. |
