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Powerful
chief-of-staff resigns amid corruption allegations
On 16 June,
President Lula’s chief-of-staff José Dirceu resigned amid corruption
allegations that he had coordinated a broad scale corruption scheme to
finance political party campaigns of the ruling Worker’s Party (PT,
Partido dos Trabalhadores) and knowingly tolerated the bribing of
legislators to buy votes. Dirceu was a key figure for relations between
the president and Congress and his resignation has forced President Lula
to reshuffle his cabinet. President Lula acted quickly to appoint
Minister of Mines and Energy Dilma Rousseff as his new chief-of-stafff.
Lula appointed Mauricio Tolmasquim, who was executive secretary at the
Energy and Mines Ministry, as Rousseff’s successor. Ms. Rousseff, a
former left-wing guerrilla during Brazil's military dictatorship in the
early 1970s, is a trained economist with extensive public service career.
From an economic policy perspective she clearly favours greater government
participation in the economy. Moreover, her appointment reflects the
government’s desire to consolidate PT internal party cohesiveness by
appeasing the left-wing of the party that has been perceived as
increasingly marginalized as a result of the government’s centrist
economic policy. The Dirceu scandal comes on top of additional charges of
misconduct presented against the current Central Bank president Henrique
Meirelles and the Social Security Minister Romero Jucá. Pending pension
and tax reforms are likely to take the back seat in terms of congressional
activity, as several legislative committees have been set up to
investigate the misconduct by government officials and the October 2006
general elections are likely to postpone any meaningful progress.
Robust
domestic demand rebound moderating
National
retail sales rose 3.4% in April over the same month last year, which was
less than half the 7.7% expansion observed the prior month. Strong
declines in supermarket household goods sales, which were down 9.9% and
6.4% respectively over April 2004, accounted for the deceleration in
overall retail sales. The only sector to experience strong growth in
sales was office equipment, which rose 23.9% over the same month the prior
year. As a result of the deceleration registered in April,
the downward trend in
overall retail sales activity observed since January remained intact, with
the the annual average growth rate dropping from 8.8% in March to 8.2% in
April.
However, more
recent data indicate that the current downward trend may be coming to an
end. According to more
recent data from the São Paulo Retail Federation (Fecomercio, Federação
do Comércio do Estado de São Paulo), retail sales rose 10.4% in May
over the same month the previous year, almost double the 5.4% expansion
observed in April. While retail sales in the automobile sector,
pharmacies and household appliances remained very robust, supermarket and
furniture sales experienced declines. Nevertheless, consumer confidence
diminished further in June amid initial indications that economic activity
may be slowing further. The joint survey by the Fundação Getúlio
Vargas (FGV) and Fecomercio indicates that consumer confidence
dropped from 134.1 in May to 133.1 in June, on a scale between 0 and 200,
where 100 indicates the dividing line between pessimism and optimism.
Higher
interest rates likely to slow investment growth
The
persistent monetary tightening by the Central Bank does not yet appear to
be stalling investment activities. According to figures from the National
Statistical Institute (IBGE), capital goods production in industry rose
3.4% in May over the same period last year, which was up from the 2.7%
pick-up observed in the previous month. Moreover, seasonally adjusted
data confirm the tendency reflected in the annual figure, as capital goods
output actually rose 3.37% over April. Furthermore, more recent trade
data indicate that investment may have recovered moderately in June, as
capital goods imports were up 31.8% over the same month last year. The
June figure was only moderately below the 33.0% reading registered the
prior month.
Trade surplus widens
despite lower global demand
In the second quarter,
the trade balance incurred a surplus of US$ 11.4 billion. The second
quarter surplus was above the US$ 8.3 billion surplus observed in the
first quarter and also well ahead of the US$ 8.9 billion surplus observed
in the second quarter last year. Robust export growth of 22.5% year-on-year
provided the push behind the widening in the trade surplus, as import
growth reached a lower 19.3%. Exports benefited from strong demand for
manufactures in the United States and healthy purchases of basic goods in
Asia and Europe.
Government
outlook revised downward
As a result
of the moderation in economic activity observed so far this year, the
Central Bank lowered the estimate for gross domestic product (GDP) growth
for this year from 4.0% to 3.4%. Consensus Forecast participants also
continue to adjust forecasts to the less favourable developments observed
in the first half of the year. Panellists expect economic growth to reach
3.3%, which is down 0.2 percentage point from last month. Next year,
growth should pick up modestly with the economic expansion anticipated by
Consensus Forecast participants to reach 3.5%, down 0.2 percentage points
from last month.
Consensus
lowers inflation forecast
In June,
consumer prices dropped 0.02%, which was well below market expectations of
a 0.30% increase and down notably from the 0.49% increase observed the
prior month and represented the lowest monthly rate observed since June
2003. Lower fuel and food prices accounted for the strong moderation in
the consumer price increase. As a result of the modest June reading, the
annual inflation rate dropped from 8.1% in Mary to 7.3% in June. At the
current level, annual inflation is well above the 4.5% Central Bank’
inflation target for this year but continues to be within the +/- 2.5%
tolerance margin. However, the successive interest rate hikes of recent
months have helped lower inflationary expectations. While Consensus
Forecast participants expect that the Central Bank will overshoot the
inflation target for the fifth consecutive year, they have lowered their
projection from 6.0% expected last month to 5.9%. Furthermore, next year,
inflation is likely to proceed along a declining trajectory ending the
year at 5.0%. The projected rate is still well ahead of the upper end of
the +/- 2.5% range around the central target of 3.5%. The government now
estimates that inflation will reach 3.7%, which was revised downward in
June from the previous forecast of 3.8%.
Central
Bank halts tightening cycle
On 15 June,
the Central Bank’s monetary policy planning committee (COPOM) decided to
leave the benchmark SELIC interest rate unchanged at 19.75%, following
nine consecutive monthly upward revisions that brought the SELIC to the
highest level observed since September 2003. Monetary officials noted
that initial signs of a moderation in economic activity, the persistent
exchange rate appreciation and successive monetary tightening have begun
to ease pressures on consumer prices. However, high oil prices continue
to overshadow the inflationary setting and prompted the Central Bank to
maintain a neutral policy stance for the time being. Consensus Forecast
participants anticipate that monetary authorities will begin to ease in
the third quarter of this year and further in the final quarter to bring
the SELIC interest rate to 17.5% by year-end. Next year, the moderation
in inflation should help enable the Central Bank to lower interest rates
further with the benchmark interest rate seen declining further to 15.2%. |
