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Industrial
production continues to moderate amid high interest rate setting
Industrial
production rose just 0.2% in September over the same month last year. The
September reading was well below the 3.7% increase observed in the prior
month and confirmed a generalized weakening trend registered in the third
quarter. Output declines were most pronounced in clothing, shoes and
leather goods as well as wood products. However, strong double-digit
growth in office and computer equipment as well as electronic materials
and communications equipment helped offset a more pronounced drop in
industrial production. Industrial production data show that investment
activity, in contrast, accelerated strongly in September, as capital goods
output rose 6.4% over the same month last year, which was up from the 3.6%
expansion the previous month. Output of intermediate and consumer goods
remained very subdued with growth of 0.4% and 0.3% respectively. A
month-on-month comparison confirms the deceleration in industrial
activity, as seasonally adjusted production dropped 2.03% over August –
contrasting the 0.85% growth the prior month. Furthermore, the downward
trend in industrial output growth that has persisted since February
remained in place. In September, the annual average growth rate in
industrial production dropped from 5.1% in August to 4.4%. Consensus
Forecast participants expect further moderation in industrial production
this year with output expected to slow to a 4.2% growth pace, which is
down 0.5 percentage points from last month’s Consensus Forecast figure.
Growth
pace of retail sales moderating
Private
consumption growth is slowing. According to the National Statistical
Institute (IBGE), national retail sales rose 6.5% in August over the same
month last year, which was up from the 4.5% growth pace observed the
previous month. Disaggregated data, however, provide an uncertain picture
for the retail sector, as half of the sub-sectors experienced declines in
activity with supermarket sales dropping 6.0% compared to August last
year. Robust office equipment and clothing sales helped offset declines
in other sectors. Despite the more pronounced August reading,
the annual average
growth rate in retail sales remained unchanged at 6.3%.
More
recent data from the São Paulo Retail Federation (Fecomercio, Federação
do Comércio do Estado de São Paulo) indicate that retail sales rose
3.0% in September over the same month last year, which was well below the
stellar 12.7% growth rate observed in August. Robust clothing and
automotive sales were offset by strong declines in construction material
and electronics sales. According to Fecomercio, better employment
and credit conditions are helping sustain the private consumption
expansion, while incomes are experiencing a less pronounced push. As a
result of the more subdued September reading, the annual average growth
rate of retail sales dropped from 6.5% in August to 6.4%. Moreover, in
October, consumer confidence dropped 1.0% following the 13.1% decline
registered in September. Fecomercio data indicate that the general
consumer confidence index (ICC) fell from 109.3 in September to 108.4 in
October, on a scale between 0 and 200, where 100 indicates the dividing
line between pessimism and optimism.
Outlook
points to further deceleration
The
deceleration in domestic demand observed so far in the second half of the
year is likely to persist through the end of the year. Continued strong
export growth, however, should help offset a pronounced drop in economic
growth. Consensus Forecast participants expect gross domestic product
(GDP) to expand 3.3% this year, which is unchanged from last month’s
Consensus Forecast estimate and does not reach the official forecast of
3.4%. The more benign monetary setting next year should help revive
domestic demand. As a result, Consensus Forecast participants expect
anticipate that economic activity will grow 3.7%, which is up 0.1
percentage points from last month.
Consumer
prices driven up by rising fuel costs
Consumer
prices increased 0.75% in October, which was up from the 0.35% increase
observed the prior month and in line with market expectations. Rising
transport prices, in the wake of the strong increase in fuel prices, were
the key factor behind the higher October reading. Transport price rose
2.21% in October over September. Most other sub-categories that comprise
the consumer price index increased moderately with household good as well
as education prices actually declining over the prior month. As a result
of the higher October figure, annual inflation rose from 6.0% in September
to 6.4%, which exceeds the Central Bank’s 5.1% inflation target and
forecast for this year. Nevertheless, Consensus Forecast panellists
anticipate that inflation will resume the downward trend initiated in June
to reach 5.3% by year-end, unchanged from last month’s figure. Consensus
Forecast participants expect inflation to moderate further next year to
reach 4.7%. The Consensus Forecast figure remains within monetary
authorities’ +/- 2.5% range around the central target of 3.5%
Monetary
policy easing remains on track
On 19
October, the Central Bank’s monetary policy committee (COPOM) cut the
benchmark SELIC interest rates by 50 basis points to 19.0%. The October
move represented the second consecutive monthly lowering of the SELIC rate
and signals that the Central Bank has begun a new cycle of monetary easing
following the restrictive policy stance initiated in September last year
that came to a halt in June when authorities took on a neutral bias. At
the current level the benchmark interest rate is at the lowest level
observed since February this year. Consensus Forecast participants expect
the improved inflationary setting to enable the Central Bank to continue
to ease monetary policy through the end of the year with the SELIC rate
expected to drop to 17.7% by year-end. Moreover, Consensus Forecast
panellists anticipate the monetary authorities to ease policy further next
year amid the less robust growth scenario and declining inflation. As a
result, the benchmark interest rate is expected to decline to 15.2% by the
end of next year.
Central
Bank continues intervening in currency markets
In
October, the Central Bank continued its exchange rate policy of
intervening in currency markets recommenced on 3 October - authorities had
temporarily halted intervention on 11 August following virtually a year of
foreign exchange market intervention. Authorities remain concerned that
the persistence of currency appreciation will halt the current export
expansion and dent growth. As a result of the Central Bank’s efforts, the
currency depreciated 1.42% nominally in October to reach 2.25 reais
to the US$. However, the October weakening was insufficient to stem the
strong 6.37% appreciation observed in September. As a result, the
currency remained 27.1% stronger compared to the same month last year. A
combination of continued US$ weakening in international currency markets
along with strong export and investment flows have served to bolster the
currency. As a result of the Central Bank intervention, international
reserves rose US$ 3.1 billion in October to reach US$ 60.1 billion – the
highest level observed since July 1998. Nevertheless, Consensus Forecast
panellists do not expect the currency strengthening trend to persist in
the final months of the year with the exchange rate anticipated to reach
2.49 reais to the US$ - a 6.6% nominal annual appreciation. Next
year, the appreciation trend is likely to come to an end according to
Consensus Forecast participants, with the exchange rate depreciating 4.4%
to reach 2.60 reais to the US$ by year-end.
Current
account surplus widens further as exports surge
In the
third quarter this year, the current account balance registered a record
surplus of US$ 5.8 billion, which was well ahead of the US$ 2.6 billion
surplus observed in the second quarter and exceeded the US$ 5.3 billion
surplus in the third quarter last year. The notable widening in the
trade balance accounted for the improvement in the current account balance
over the same period last year. In the third quarter the trade surplus
reached US$ 13.0 billion, which was ahead of the US$ 10.0 billion surplus
observed in the third quarter of 2004. Despite the strengthening in the
currency, export growth remained very strong, expanding 22.5% compared to
the same quarter last year, which was unchanged from the previous
quarter. Furthermore, more moderate domestic demand drove down import
growth, which decelerated from a 19.3% expansion in the second quarter to
18.6% growth in the third. As a result of the third quarter reading, the
annual current account surplus rose from US$ 12.4 billion in the second
quarter to US$ 13.1 billion in the third. Nevertheless, Consensus
Forecast panellists anticipate that the current account will narrow in the
final quarter to reach US$ 12.5 billion by year-end. Next year, Consensus
Forecast participants expect the current account surplus narrow
significantly to US$ 7.1 billion, amid a further slowdown in export growth
and less robust domestic demand. |
