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Tepid economic rebound
but investment surges
In the fourth quarter,
gross domestic production rose 1.4% over the same quarter the previous
year, which was below market expectations of a 1.7% expansion but ahead of
the 1.0% growth pace registered in the third quarter of last year.
Domestic demand accounted for the acceleration in the final quarter amid a
very strong investment expansion, while export growth slowed from a double-digit
pace observed since the first quarter of 2004. Both the manufacturing
industry and the agricultural sector contracted in the final quarter,
while growth remained moderate in most other sub-sectors.
A
quarter-on-quarter comparison corroborates the acceleration suggested by
the annual figures. According to seasonally adjusted data, economic
activity grew 0.85% over the preceding quarter.
As a result of the
fourth quarter reading, the full-year growth rate reached 2.3% last year,
which was just a notch below the 2.4% Consensus Forecast figure but less
than half the 4.9% registered in 2004.
Optimism returning due
to improving monetary policy setting
Economic
activity is likely to rebound this year amid the improved monetary policy
setting. 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 quarter to 57.3 points in the final quarter of
last year, where 50 points separates optimism from pessimism. Moreover,
according to the joint survey of the Fundação Getúlio Vargas (FGV)
and Fecomercio, consumer confidence in São Paulo rose 0.61% in
January over the previous month from 131.3 in December to 132.1 on a scale
between 0 and 200, where 100 is the dividing line between pessimism and
optimism. Despite the modest increase in January, consumer confidence is
clearly on a recovery path, as the reading represented the third
consecutive monthly increase. Solid government debt management, the
improved economic policy environment and improved prospects for healthier
economic growth prompted the international rating agency, Standard and
Poor’s, to upgrade sovereign debt ratings from “BB-“ to “BB” on 28
February – the highest rating ever awarded to Brazil. Consensus Forecast
participants expect gross domestic product (GDP) to rise by 3.4% this
year, which is unchanged from last month’s estimate and remains below the
Central Bank’s 4.0% growth forecast. Next year, Consensus Forecast
panellists believe that economic activity will pick up slightly with
growth reaching 3.6%, which is also unchanged from last month’s forecast.
Consumer
price increases remain moderate
Consumer
prices rose 0.41% in February, which was almost in line market
expectations of a 0.43% increase and below the 0.59% rise in January.
Seasonal pressures resulting from the new school year and fuel-price
related adjustments to urban transportation tariffs accounted for the lion
share of the February rise, as increases in most other sub-categories
remained modest. As a result of the February price developments, the
annual inflation rate dropped from 5.7% in January to 5.5%, which is well
above the 4.5% monetary policy target of the Central Bank but within the
+/- 2.5% range around the central target. The improved inflationary
setting prompted the monetary authorities to lower the benchmark SELIC
interest rate for the sixth consecutive month on 1 March from 17.25% to
16.50%. Consensus Forecast participants anticipate that consumer price
pressures will moderate further this year with year-end inflation expected
to reach 4.6%, which is down 0.1 percentage points from last month’s
forecast figure. Next year, inflation is likely to remain at the same
level, as Consensus Forecast participants expect consumer prices to rise
4.4%, which is unchanged from last month’s figure.
Currency continues to
strengthen despite Central Bank efforts
In February, the
exchange rate appreciated 3.5% in nominal terms to reach 2.13 reais
to the US$. The February strengthening followed a 5.8% appreciation in
January and brought the currency to trading 21.5% stronger than during the
same month last year. The virtually unabated appreciation trend observed
since the end of 2004 has continued despite the Central Bank’s active
intervention in the exchange rate markets and the government’s purchases
of foreign currency to retire outstanding external debt. In February,
international reserves rose by US$ 528 million following a US$ 3.1 billion
increase in January to reach US$ 57.5 billion. Consensus Forecast
participants expect the current appreciation trend to reverse this year
with the currency depreciating 7.8% from its current level to reach 2.31
reais to the US$ by year-end. Next year, Consensus Forecast
panelists expect the exchange rate to depreciate 4.0% to close at 2.41
reais to the US$. |
