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Growth
slows notably
In the
first quarter, gross domestic product (GDP) grew 2.9% over the same
quarter last year, which was below market expectations of 4.0%. The first
quarter reading was well below the 4.7% figure observed in the prior
quarter and continued the moderation in economic activity observed in the
second half of last year. A quarter-on-quarter comparison confirms the
slowdown in the annual data. In seasonally adjusted terms, economic
activity grew 0.32% over the fourth quarter last year, which was down from
the 0.42% expansion observed in the previous quarter.
Domestic
demand growth shrinks
A
pronounced slowdown in domestic demand accounted for the overall
deceleration in economic activity. The external sector, in contrast,
continued to develop favourably. In the first quarter, domestic demand
rose just 2.5%, which was almost half the 4.9% growth rate observed in the
final quarter of last year. Plummeting investment growth was the key
factor behind the domestic demand slowdown. Investment decelerated from
9.3% year-on-year growth in the fourth quarter last year to a meagre 2.3%
expansion. Total consumption also slowed notably from 3.8% growth in the
prior quarter to a 2.5% expansion, amid significantly lower private
consumption growth.
External
sector continues on healthy growth path
Exports
remained robust in the first quarter with growth reaching 13.6% over the
same quarter last year. The first quarter export growth figure was only
moderately below the 16.2% expansion in the previous quarter. Import
growth also remained healthy, experiencing a 12.2% expansion compared to
the first quarter last year, which was down from 12.8% growth in the prior
quarter.
Slowdown
broad-based
With the
exception of agriculture (+4.2% year-on-year), mining (+3.7% yoy) and
transportation (+4.1% yoy), all economic sectors experienced a slowdown
compared to the prior quarter. The first quarter moderation was most
pronounced in manufacturing, where growth slowed to 3.6% compared to the
same quarter last year (Q4 04: +8.3% yoy) and construction, which expanded
0.6% (Q4 04: +5.2% yoy) respectively.
Private
consumption continues to moderate
More
recent data indicate that private consumption continued to decelerate in
the second quarter of the year. According to the São Paulo Retail
Federation (Fecomercio, Federação do Comércio do Estado de São Paulo),
retail sales rose 5.4% in April over the same month last year. The April
figure was well below the 14.7% expansion registered in the previous
month. Pronounced declines in furniture and supermarket sales accounted
for the deceleration in retail sales activity in April, as most other
sub-sectors continued to do well. Furthermore, consumer confidence
continues to deteriorate, as prospects for higher interest rates raise
concerns about economic growth. According to the joint survey of the
Fundação Getúlio Vargas (FGV) and Fecomercio, consumer
confidence in São Paulo fell 5.6% in May over the previous month from
142.0 in April to 134.1, on a scale between 0 and 200, where 100 is the
dividing line between pessimism and optimism.
Investment
remains healthy but no clear trend emerging
Industrial
production data suggest investment activity remained healthy in the second
quarter. In April, capital goods output rose 3.3% over the same month
last year, which was up from the 0.5% expansion observed the prior month.
A month-on-month comparison does not bear out the healthy output growth
observed in the annual figures. In seasonally adjusted terms, capital
goods output plummeted 2.92% over the prior month. However, more recent
trade figures do not provide a clear indication of the investment
deceleration. In May, capital goods imports grew 33.0% over the same
month last year, which was up from the already robust 20.7% growth
observed in April. Moreover, the year-on-year growth rate of annualized
capital goods imports rose from 22.7% in April to 23.9% in May.
Outlook
revised downward amid interest rate worries
The high
interest rates – Brazilian real interest rates are among the highest in
the world - have clearly begun to make a dent in economic growth. As a
result, the government decided on 24 May to cut this year’s forecast for
GDP growth from 4.3% to 4.0%, which is now on par with the Central Bank’s
estimate. Consensus Forecast participants are even less optimistic about
growth prospects for this year. As a result of the weak first quarter
reading, panellists have revised their projections for this year
downward. Economic growth is now anticipated to reach 3.5%, which is down
0.2 percentage points from last month’s figure and represents the second
consecutive downward revision. Next year, growth is expected to stay the
course of a more moderate economic expansion with economic activity
anticipated to reach 3.7%.
Exchange
rate appreciation persists
In May,
the currency appreciated 6.4% in nominal terms, which was up from the 5.3%
strengthening observed in April. As a result, the exchange rate reached
2.38 reais to the US$ by the end of the month. The continued US$
weakness in international markets accounts for the lion share of the
ongoing currency appreciation, which has persisted virtually unabated for
a year now. To counter the appreciation, the Central Bank had until
recently actively intervened in exchange rate markets. From early
December through mid-March, monetary authorities have purchased US$ 12.9
billion in foreign exchange markets. As a result, international reserve
levels remain at the highest levels observed since before the currency
devaluation in 1998. In May, international reserves reached US$ 60.9
billion, which was US$ 8.1 billion above the level at the end of last
year. As a result of the strong appreciation observed in April and May,
the currency was 11.6% stronger than at the end of last year. Consensus
Forecast participants anticipate that the current strengthening will
reverse this year and that the currency will close at 2.72 reais to
the US$, which would represent a 2.5% nominal depreciation. Next year,
the depreciation trend is likely to remain in place with the exchange rate
expected to reach 2.85 reais to the US$ by year-end – a 4.5%
nominal annual depreciation.
Inflation
remains well ahead of target
The May
consumer prices rose 0.49%, which was below of the 0.87% figure observed
the prior month and the 0.54% figure anticipated by Consensus Forecast
participants. Strong hikes in regulated prices, which were adjusted
upward on 31 March accounted for the lion share of the May increase.
Medical costs registered the strongest monthly variation, followed by
electricity prices. As a result of the May figure, annual inflation
remained unchanged from April at 8.1%, which is well above the 4.5%
Central Bank’s inflation target for this year but within the +/- 2.5%
tolerance margin. Consensus Forecast participants anticipate that
monetary authorities will overshoot the central inflation target rate for
the fifth consecutive year, anticipating consumer prices to increase at a
more pronounced 6.0%. Furthermore, Consensus Forecast panellist expect
the Central Bank to exceed next year’s inflation target as well, with
consumer prices seen increasing 5.1%, one percentage point below the upper
end of the +/- 2.5% range around the central target of 3.5%.
Inflation
concerns prompt further Central Bank tightening
In its 18
May monetary policy meeting, the Central Bank opted to raise the benchmark
SELIC rate by 25 basis points to 19.75%. The May tightening represented
the ninth consecutive monthly hike and brought the SELIC rate to the
highest level observed since September 2003. Monetary officials cited
concerns about oil price developments and the inflationary pass through
from increases in controlled prices as key factors behind the May
decision. As a result of the May move, panellists have raised this year’s
interest rate forecasts by 0.3 percentage points from last month but
anticipate that the Central Bank will gradually lower the benchmark rate
throughout 2005 to 17.4% by year-end. Moderating inflation next year
should give monetary authorities additional leeway to reduce interest
rates further, as Consensus Forecast panellists expect the SELIC rate to
decline to 15.1% by the end of next year. |
