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Industrial
sector recovers ground
The
incipient recovery in the industrial sector observed in October and
November last year picked up speed in December. Industrial production
rose 3.2% in December over the same month the prior year, which was well
ahead of market expectations and exceeded the 0.9% increase registered in
November. Within the industrial sector, mining experienced the strongest
expansion followed by manufacturing. Mining benefited from increased
strong growth in oil and gas output, while the manufacturing sector
registered strong expansions in office and computer equipment, electrical
equipment and pharmaceuticals. Furthermore, strong capital and consumer
goods production drove the December figure. A month-on-month comparison
confirms the December pick-up in industrial production, as output grew
2.27% over the preceding month in seasonally adjusted terms. As a result
of the healthy reading, full-year growth in industrial production reached
3.1% in 2005. This year, Consensus Forecast participants expect
industrial production to increase 4.1%, which is down 0.2 percentage
points from last month’s estimate.
Domestic
demand recovery likely to foster economic rebound
Growth in
the export sector is likely to moderate this year given the strong
comparison of last year. However, a high likelihood of further Central
Bank monetary policy easing will drive a recovery in domestic demand.
Furthermore, moderate increases in consumer prices along with declining
unemployment are likely to bolster private consumption. In December,
unemployment reached 8.3%, which represented a nine-year low and was well
below the 9.6% figure in December the previous year. Furthermore, the
joint survey of the Fundação Getúlio Vargas (FGV) and Fecomercio
shows that consumer confidence in São Paulo rose 11.9% in December over
the previous month, increasing from 117.4 in November to 131.3, on a scale
between 0 and 200, where 100 is the line between pessimism and optimism.
Furthermore, according to the National Industry Confederation (CNI,
Confederação Nacional da Indústria, Indicadores Industriais), the
business confidence index for industry expectations (ICEI) increased from
55.7 points in the third to 57.3 points in the final quarter of last year,
where 50 points separates optimism from pessimism. Consensus Forecast
participants expect economic activity to continue to accelerate throughout
this year, with full-year growth in gross domestic product (GDP) reaching
3.4%, which is down 0.1 percentage points from last month’s Consensus
Forecast figure and below the 4.0% Central Bank estimate. Next year, the
pace of economic activity should accelerate more moderately with growth
reaching 3.6%, which is unchanged from last month.
Consumer
price increases remain moderate
In
January, consumer prices rose 0.59%, which was up from the 0.36% increase
registered in the previous month and virtually on target with last month’s
Consensus Forecast. Transportation and health costs experienced the
strongest increases in January, while prices on most other sub-categories
rose only moderately. As a result of the January reading, the annual
inflation rate remained at 5.7%, which was unchanged from December and
exceeds the Central Bank’s 4.5% monetary policy target, but is within the
+/- 2.5% range around the central target. Given the moderation in
inflation, the Central Bank decided on 18 January to cut the benchmark
SELIC interest rate by an additional 75 basis points to 17.25%. The
January move represented the fifth consecutive easing of monetary policy
and brought the SELIC rate to the lowest level since November 2004.
Despite the acceleration in domestic demand growth, Consensus Forecast
participants expect inflation to decline this year. In fact, consumer
prices are anticipated to rise 4.7%, which is unchanged from last month’s
estimate. Next year, inflation is unlikely to drop notably, as Consensus
Forecast participants expect consumer prices to rise 4.4%, which is in
line with the Central Bank’s inflation target that also includes a
tolerance margin of +/- 2.5% around the central target.
Currency
appreciation persists despite Central Bank intervention in currency
markets
In
January, the currency appreciated 5.84% nominally versus the US$ to reach
2.21 reais to the US$. The January appreciation reversed the 5.71%
depreciation registered in December but continued an appreciation trend
that persisted throughout most of last year. The currency appreciated
despite continued Central Bank intervention in the currency markets to
weaken the exchange rate in order to ensure that the current export
expansion is not halted as a result. Last year, monetary authorities
purchased US$ 21.49 billion on the spot foreign exchange market added to
by substantial operations in the forward market. In January, active
Central Bank intervention raised international reserves by US$ 3.1 billion
– lifting the balance to US$ 56.9 billion. Due to the January
appreciation, the currency traded 18.7% stronger than in the same month
last year. Nevertheless, Consensus Forecast panellists do not expect the
currency strengthening trend to persist this year with the currency
depreciating 1.3% to reach 2.37 reais to the US$ by year-end.
Current
account narrows as services balance deteriorates
The
current account balance registered a surplus of US$ 3.2 billion in the
final quarter of last year. The surplus was well below the US$ 5.8
billion surplus observed in the third quarter but ahead of the US$ 2.0
billion surplus figure registered in the fourth quarter the prior year. A
notable widening in the service balance deficit, which deteriorated from a
US$ 7.5 billion deficit in the fourth quarter 2004 to a US$ 9.9 billion
deficit, was only partially offset by a higher trade surplus. In the
fourth quarter, the trade surplus reached US$ 12.1 billion, which was up
from the US$ 8.6 billion surplus figure of the fourth quarter of 2004.
Despite the continued strengthening of the exchange rate, export growth
remained very strong through the end of the year. In the fourth quarter,
exports grew 20.6% annually, which was down from the 22.5% expansion in
the previous quarter. Imports grew at a lesser but robust 10.6%
year-on-year – up from the 18.6% growth registered in the prior quarter.
As a result of the fourth quarter reading, the annual current account
surplus dropped from US$ 14.8 billion in the third quarter to US$ 14.2
billion. Consensus Forecast participants expect the current account to
narrow to US$ 7.6 billion this year. |
