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Growth on
healthy expansion path
The more
complete data set released by the National Statistical Institute (IBGE) on
29 September confirmed the strong 3.9% expansion in gross domestic product
(GDP) registered in the second quarter that was reported in August.
Despite suffocating high interest rates following successive hikes by the
Central Bank throughout this year, domestic demand remained robust and
exports boomed in spite of the continued appreciation in the exchange
rate. A quarter-on-quarter comparison confirmed the pick-up in the
economy, as activity grew 1.42% over the previous quarter in seasonally
adjusted terms compared to a 0.38% expansion in the first quarter of this
year.
Private
consumption on solid growth track but political woes linger
More recent
data show that domestic demand remains on a healthy trajectory. According
to IBGE, national retail sales rose 4.5% in July over the same month last
year, which was down from the 5.3% expansion observed the previous month.
A strong decline in supermarket sales prompted the deceleration in retail
sales activity, while most other retail sub-sectors remained in healthy
growth territory with office equipment sales leading the way. A
month-on-month comparison bears out the deceleration implied by the annual
figure, as seasonally adjusted activity rose 0.30% over June, when sales
had increased 1.11%. More recent data from the São Paulo Retail
Federation (Fecomercio, Federação do Comércio do Estado de São Paulo)
show that retail sales increased 12.7% in August over the same month last
year, which was well ahead of the already robust 9.8% expansion registered
in July. Retail sales in the automobile sector prompted the strong surge
in private consumption while clothing and furniture sales also experienced
healthy growth. Fecomercio sustains that improved employment
conditions and rising incomes accounted for the improved retail sales.
IBGE data show that unemployment remained at a three year low of 9.4% in
August, while incomes were up 3.7% in real terms in August over the same
month last year. On the downside, consumer confidence diminished further
in August amid increased consumer concerns that the political crisis
plaguing the Lula administration would spill over to the economy.
According to Fecomercio, the general consumer confidence index (ICC)
declined from 133.3 in July to 126.1 in August, on a scale between 0 and
200, where 100 indicates the dividing line between pessimism and optimism.
Investment
growth proceeds along healthy growth path
Industrial
production data suggest that investment activity remained healthy through
the end of the third quarter. In August, capital goods output rose 3.0%
over the same month last year, which reversed the 3.9% contraction
registered the prior month. A month-on-month comparison confirms the
robust output expansion observed in the annual data. In seasonally
adjusted terms, capital goods output increased by 3.13% over the prior
month, which contrasted the 7.05% decline registered the previous month.
In addition, more recent trade figures indicate that investment activity
remained through the end of the third quarter. In September, capital
goods imports were up 32.0% over the same month last year, which was down
from 41.3% growth observed in August.
Trade surplus widens despite stronger exchange rate
In the third quarter, the
trade balance incurred a surplus of US$ 13.0 billion. The third quarter
surplus was above the US$ 11.4 billion surplus observed in the second
quarter and also exceeded the US$ 10.1 billion surplus observed in the
third quarter last year. Exports grew 24.7% year-on-year and were the key
driver behind the trade surplus widening, as the import expansion came in
at a lower 22.6% pace. Export growth was propelled by robust demand for
manufactures in the United States and
neighbouring
economies as well as rising purchases of basic goods in Asia and Europe.
Outlook for
more deceleration
According to
this month’s Consensus Forecast, economic growth is likely to decelerate
moderately in the second half of this year, despite continued robust
domestic demand, booming exports and increased prospects for monetary
easing from the Central Bank. Consensus Forecast participants expect GDP
to expand 3.3% this year, which is unchanged from last month’s Consensus
Forecast figure and does not reach the government’s official forecast of
3.4%. Nevertheless, the economy is anticipated to gain momentum next
year, as Consensus Forecast panellists anticipate that GDP will grow 3.6%,
which is up 0.1 percentage points from last month.
Consumer
prices head downward
In
September, consumer prices rose 0.35% over September 2004, which was down
up from the 0.17% increase registered in the previous month and virtually
on target with the 0.34% Consensus Forecast expectations last month.
Transportation, personal expenditures and housing costs experienced the
strongest increases in September, while prices on most other
sub-categories rose only moderately. A pronounced increase in gasoline
prices, which rose 3.4% over August, was responsible for the
transportation price rise. As a result of the September reading, the
annual inflation rate remained unchanged at 6.0%, which is within the +/-
2.5% tolerance margin around the central 4.5% inflation target of the
Central Bank for this year. Consensus Forecast participants expect annual
inflation to reach 5.3% this year, which is down 0.3 percentage points
from last month’s estimate but remains above the government’s current 5.1%
estimate. Next year, consumer price increases are likely to moderate
despite the pick-up in economic growth with annual inflation seen to drop
to 4.7%, which is down 0.1 percentage points from last month but exceeds
the 4.5% monetary policy target, however still within the +/- 2.5% range
around the central target.
Central Bank
eases monetary policy amid improved inflation setting
On 13
September, the Central Bank’s monetary policy committee (COPOM) lowered
the benchmark SELIC interest rate by 25 basis points to 19.50%. The
robust pace of economic growth, high oil prices and rising inflationary
pressures had prompted authorities to adopt a tightening cycle in
September last year, which came to a halt in May when the Central Bank
took on a neutral bias. The September move represented the first easing
of monetary policy by the Central Bank since April 2004. Consensus
Forecast participants expect monetary officials to bring down the interest
rates further in the last quarter with the SELIC rate anticipated to drop
to 17.6% by year-end. Next year, further easing of inflationary pressures
should help bring down the benchmark interest rate further to 15.1%.
Central Bank
resumes currency market intervention
On 3
October, monetary authorities resumed foreign exchange market intervention
to stem the persistent currency appreciation that is worrying the
government, as it threatens to stop short the current robust export
expansion short. The Central Bank had halted intervention on 11 August
but has resumed amid the continued appreciation in the real. In
September, the currency appreciated 6.37% nominally to reach 2.22 reais
to the US$. The September appreciation was the strongest observed since
May and had the currency trading 19.4% stronger than at the end of last
year. The combination of the weakening of the US$ in international
currency markets over the past year along with resilient exports and
strong investment flows have been key factors behind the consistent
appreciation in the currency. However, Consensus Forecast participants do
not expect the appreciation trend to persist as the exchange rate is
anticipated to reach 2.52 reais to the US$ by the end of the year –
a 5.3% nominal annual appreciation. Next year, the currency is likely to
depreciate 5.2% with Consensus Forecast participants expecting the
exchange rate to close at 2.66 reais to the US$. |
