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Economic
activity accelerates
Despite
higher interest rates, gross domestic product (GDP) grew 3.9% in the
second quarter of this year compared to the same quarter in 2004, which
was above last month’s Consensus Forecast projection of a 3.3% expansion
and exceeded the first quarter reading of 2.8% growth. A
quarter-on-quarter comparison confirms the pick-up in economic activity,
as GDP expanded 1.42% over the previous quarter in seasonally adjusted
terms compared to 0.38% in the first quarter.
Domestic
demand bolstered by investment pickup
The
acceleration observed in the second quarter was entirely due to domestic
demand while the net contribution from the external sector diminished.
Investment accelerated notably in the second quarter, growing 4.0%
year-on-year, which was up from the more moderate 2.3% reading the
previous quarter. Total consumption also accelerated but at a lesser
pace, as private consumption moved from a 3.3% expansion in the first to
3.9% growth in the second quarter, while public consumption accelerated
from 1.1% growth to a 3.1% expansion. As a result, domestic demand grew
3.2% in the second quarter, which was up from the 2.7% reading in the
first quarter. Finally, despite initial concerns that more moderate
global demand would affect the external sector, export growth remained in
double-digit territory with growth reaching 12.9% in the second quarter
over the same period last year. However, the expansion was below the
13.6% growth registered in the first quarter. Furthermore, import growth
remained robust with growth reaching 12.7% in the second quarter, which is
up from 12.2% in the first.
Mining,
public utilities services and manufacturing drive growth pace
The mining
sector experienced the strongest expansion in the second quarter, with
growth picking up notably from the 3.7% figure observed in the first
quarter to 17.5% growth in the second – the highest growth pace registered
since the fourth quarter of 2000. Notable increases in oil and natural
gas output, which expanded 24.7% and 17.8% respectively in the second
quarter, accounted for the boost to the mining sector. Public utility
services also experienced solid growth of 4.6%, which was up from a 3.3%
expansion in the first quarter. Manufacturing continued to proceed along
a healthy but much less pronounced expansion path than mining with growth
reaching 4.1% in the second quarter (Q1: +3.6% year-on-year).
Outlook
for moderation
The pace
of economic activity is likely to accelerate moderately in the second half
of this year amid increased prospects for renewed monetary easing from the
Central Bank. Nevertheless, Consensus Forecast participants do not expect
this year’s growth pace to reach the 2004 levels. In fact, Consensus
Forecast participants anticipate that economic activity will expand 3.2%
this year, which is below the government’s official forecast of 3.4% but
0.1 percentage points below last month’s Consensus Forecast estimate.
Economic growth is likely to experience renewed momentum next year, as
Consensus Forecast panellists expect GDP to expand 3.5%, which is up 0.1
percentage points from last month.
Consumer
prices continue on downward path
In August,
consumer prices rose 0.17%, which was below the 0.25% observed the prior
month and also below the 0.42% Consensus Forecast estimate. The July
reading continued a trend to more moderate price increases observed since
May. Communications prices experienced the strongest increase in August.
The primary driver behind the increase in communications costs was a
telephone tariff increase implemented on 3 July. Most other consumer
price increases remained subdued with food and beverage prices
experiencing the third consecutive month of decreasing prices. As a
result of the August reading, the annual inflation rate declined from 6.6%
in July to 6.0%. At its current level, annual inflation is within the
Central Bank’s +/- 2.5% tolerance margin around the central 4.5% inflation
target for this year. Consensus Forecast participants expect the Central
Bank to overshoot the target this year for the fifth consecutive year with
annual inflation anticipated to reach 5.6%, which is down from last
month’s estimate and exceeds the government’s 5.1% goal. Moreover, next
year, annual inflation is expected to reach 4.8%, which is also above the
4.5% monetary policy target but within the +/- 2.5% range around the
central target.
Central
Bank maintains neutral monetary policy bias
On 16
August, the Central Bank’s monetary policy committee (COPOM) decided to
keep the benchmark SELIC interest rate unchanged at 19.75% for the third
consecutive month. According to monetary authorities, the moderation in
economic growth and the strengthened currency are considered key factors
behind the current easing in inflationary pressures. Moreover, Central
Bank officials do not expect the continued volatility in international oil
prices to prompt additional adjustments to domestic fuel prices but
caution about the continued risk that higher oil prices pose to
inflationary expectations. Thus, the Central Bank remains confident in
its current neutral monetary policy stance that puts an end to the
tightening cycle begun in September last year but has not yet hinted
towards any easing. Nevertheless, Consensus Forecast participants expect
monetary officials to lower the SELIC rate by 150 basis points in its next
meeting on 14 September. Furthermore, the benchmark rate is anticipated
to decline further to close the year at 17.5%, which is 0.2 percentage
points below last month’s estimate. The Central Bank is likely to bring
down interest rates further next year with the SELIC rate seen declining
to 15.4% by year-end.
Political
uncertainty has little enduring effect on currency
The
currency depreciation experienced in July as a result of the political
jitters appears to have been short-lived. The July weakening had resulted
from mounting concern that continued political crisis would spill over to
the economy. However, in August, the currency resumed the appreciation
trend observed virtually uninterrupted over the past twelve months, as the
currency appreciated 1.13% in nominal terms over the prior month to close
at 2.36 reais to the US$. As a result of the appreciation the
currency closed August 12.3% stronger than at the end of last year.
Consensus Forecast participants, however, anticipated that the
appreciation trend will reverse in the coming months as the exchange rate
is anticipated to close at 2.57 reais to the US$ by year-end, a
nominal annual appreciation of only 3.3%. Next year, the depreciation
trend of the latter half of this year is likely to carry over, as the
exchange rate is anticipated to experience a 4.7% depreciation to reach
2.69 reais to the US$. |
