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Growth
slows notably
In the
third quarter, gross domestic product (GDP) grew 1.0% over the same
quarter last year, which was well below market expectations of 3.5% and
the prior quarter’s 3.9% expansion. A quarter-on-quarter comparison
confirms the slowdown in the annual data. In the third quarter, economic
activity dropped 1.17% in seasonally adjusted terms over the previous
quarter, which contrasted the 1.11% growth registered the previous quarter
and represented the first decline since the second quarter of 2003.
Domestic
demand growth dwindles
A
substantial slowdown in domestic demand growth accounted for the weak
third quarter reading. Domestic demand decelerated from a 3.3% pace in
the second to just 1.4% annual growth in the third quarter. A pronounced
decline in third quarter investment activity, which reverted from a 4.0%
expansion in the second to a 2.1% contraction, was responsible for the
notable deterioration in domestic demand. Consumption growth also
moderated with growth slowing from 3.1% to 2.4%, as both public and
private consumption decelerated.
Export
growth remains robust
The export
sector continued to perform well in the third quarter with growth
moderating only slightly from a 13.0% expansion in the second quarter to
12.3% growth in the third. In line with the more subdued domestic demand,
import growth dropped to 9.5% in the third quarter over the same quarter
last year, which down from the 12.7% reading the prior quarter.
Slowdown
broad-based
With the
exception of communications and the so-called other sectors, all
sub-sectors decelerated compared to the second quarter. Even though
mining remained the strongest sector with growth of 10.3% in the third
quarter, the sector registered the strongest deceleration, as growth
plummeted 7.2 percentage points from the resilient 17.5% annual expansion
registered in the second quarter. Construction, manufacturing and
agriculture were next in line with the most pronounced declines in
activity. Construction reverted from 3.7% year-on-year growth in the
second quarter to a 1.9% contraction in the third, followed by
manufacturing (Q3: -0.9% yoy; Q2: +4.1% yoy) and agriculture (Q3: -1.9%
yoy; Q2: +3.2% yoy).
Deceleration in industrial production experiences respite
In
October, industrial production rose 0.4% over the same month last year,
which represented an improvement from the 0.1% decline in activity
registered the prior quarter. Strong output declines in textiles, wood
and medical equipment industries accounted for the meek October
performance, while most other sectors remained in positive growth
territory. Capital goods output experienced the strongest growth in
October followed by consumer goods. Intermediate goods production,
however, continued to decline. Despite the improved October reading,
however, the annual average growth rate dropped from 4.4% in September to
4.1%.
Outlook
downgrade amid weak economy
Consensus
Forecast participants have factored the weak third quarter reading into
the final quarter growth estimate for this year, as GDP is anticipated to
expand just 1.7% over the same quarter last year. The new figure is well
below the 3.4% Consensus Forecast projections in last month’s
publication. Furthermore, as a result of the weak second half
performance, the expansion in economic activity for this year is
anticipated to reach 2.8%, which is down 0.5 percentage points from last
month’s Consensus Forecast figure and is below the official government
forecast of 3.4%. Nevertheless, favourable prospects for further monetary
easing next year are likely to help bolster domestic demand. As a result,
Consensus Forecast panellists expect economic growth to accelerate to a
3.6% pace, which is down 0.1 percentage points from last month.
Inflation
heading downward
In
November consumer prices increased 0.55%, which was down from the 0.75%
increase registered the prior month and was almost on target with market
expectations of 0.53%. Higher fuel and food prices were the key drivers
behind the November pick-up in consumer prices, as increases in most other
sub-categories comprising the consumer price index remained moderate. As
a result of the November reading, annual inflation dropped to 6.2% from
6.4% in October. The November annual figure is well ahead of the Central
Bank’s 5.1% inflation target for this year. Nevertheless, Consensus
Forecast participants expect the annual inflation rate to come down in the
final month of the year to reach 5.5%, which is up 0.2 percentage points
from last month. Consensus Forecast participants also anticipate that
inflation will moderate next year, despite the acceleration in economic
growth. As a result, annual inflation is expected to reach 4.6% next
year, which is also up 0.1 percentage points from last month’s estimate
and within the Central Bank’s +/- 2.5% range around the central target of
3.5%.
Central
Bank eases monetary policy amid improved inflationary setting
On 23
November, the Central Bank’s monetary policy committee (COPOM) cut the
benchmark SELIC interest rate by 50 basis points to 18.50%. The November
move was the third consecutive month that the COPOM has decided to lower
interest rates. Monetary officials are confident that the inflationary
pressures have eased amid the more subdued growth setting. In spite of
the fact that annual inflation remains ahead of monetary authorities’
inflation target, officials are confident that the consumer prices will
continue to drop in the coming months, giving additional leeway for
further monetary easing. Consensus Forecast participants expect the
Central Bank to lower the SELIC rate further in December to 17.8%. Next
year, monetary authorities are likely to have additional room to ease
monetary policy, as the SELIC rate is anticipated to drop to 15.2% by
year-end.
Currency
continues appreciating despite Central Bank intervention
On top of
the direct currency market intervention that began again on 3 October, the
Central Bank decided to resume selling currency swap contracts as of 18
November. Monetary authorities sold US$ 9 billion in similar contracts in
February and March of this year. Throughout November, the Central Bank
sold US$ 3 billion. Government concerns about the likely detrimental
impact that the stronger currency could have on the current export boom,
have prompted monetary officials’ adoption of the foreign exchange market
intervention. However, the November move did little to keep the currency
from appreciating. In November, the currency appreciated 2.14% in nominal
terms to reach 2.21 reais to the US$. The November appreciation
more than reversed the 1.42% depreciation registered the prior month. As
a result, the currency was 24.2% stronger at the end of November compared
to the same month last year. The combination of robust exports and
healthy investment flows has provided the lion share of the momentum to
the constant currency appreciation. As a result of the Central Bank
intervention, international reserves rose by US$ 4.1 billion in November
over the preceding month to reach US$ 62.3 billion – the highest level
registered since August 1998. Consensus Forecast participants expect the
currency market interventions to weaken the currency in the last month of
the year with the exchange rate reaching 2.31 reais to the US$ - a
15.0% nominal annual appreciation. Next year, the appreciation trend is
anticipated to come to a halt with Consensus Forecast participants
anticipating the currency to depreciate 6.6% to reach 2.47 reais to
the US$ by the end of 2006. |
