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Industrial
sector continues on recovering track
The
recovery in the industrial sector continues. In March, industrial
production increased 5.2% over the same period last year, which was above
last month’s Consensus Forecast projection of a 4.6% expansion, but
slightly below the 5.4% increase registered in February. The mining
sector registered the most robust growth followed by manufacturing. In
addition, healthy capital and consumer goods production boosted industrial
output in March notably. A month-on-month comparison confirms the modest
March deceleration in production suggested by the annual data, as output
declined 0.34% over the preceding month in seasonally adjusted terms.
However, as a result of the healthy reading, the annual average growth
rate rose from 3.0% in February to 3.3%, constituting the third
consecutive month of accelerating industrial production and the highest
figure observed since November last year. Consensus Forecast participants
expect the recovery in industrial production to persist throughout the
year, with full-year growth reaching 4.1%, which is unchanged from last
month’s estimate. Next year, Consensus Forecast panellists anticipate
that industrial production growth will remain healthy with the expansion
reaching 4.4%.
Central Bank to slow
the pace of interest rate cuts to stem inflationary pressures
The current monetary
policy easing is bolstering domestic demand, which will constitute an
important driver to economic growth this year. However, in the minutes of
the 18 – 19 April monetary policy meeting, the Central Bank indicated that
it may slow the pace of further interest rate cuts this year. The Central
Bank has lowered the benchmark lending rate seven times since September
last year. However, monetary authorities are now concerned that a rapid
economic recovery will fuel inflationary pressures. Simultaneously, the
newly appointed finance minister Guido Mantega stated that the government
expects the Central Bank to continue implementing interest rate cuts.
Mantega stated that he expects the economy to grow between 4.0% and 4.5%
this year, which is slightly more optimistic than the 4.0% Central Bank
estimate. Meanwhile, concerns that the country will not meet the fiscal
targets for this year amid increased government spending ahead of
elections, were partially eased as the public sector recorded a higher
than expected primary surplus in March. The primary surplus for the
twelve months ending in March reached 4.39% of GDP, above the government’s
4.25% annual target. Moreover, on 2 May, a government official stated
that public spending is ‘under control’ and that the government is
retaining a strict fiscal policy. The official stated that the government
is currently working on a plan to cut spending in light of the
presidential elections in October. Consensus Forecast panellists expect
the economy to grow 3.5% this year, which is unchanged from last month’s
Consensus Forecast figure and below the 4.0% Central Bank estimate. Next
year, the pace of economic activity should accelerate slightly with growth
reaching 3.6%, which is unchanged from last month’s forecast.
Inflation
reaches lowest level in seven years
In April,
consumer prices increased 0.17%, which was below market expectations of
0.30% and down from the 0.37% increase observed in March. Declining food
prices offset the overall March rise, while most other price categories
experienced only modest increases. Moreover, fuel prices moderated
markedly, after having exerted notable upward pressure on the overall
price level in the past few months. As a result of the modest April price
increase, annual headline inflation dropped from 5.5% in March to 4.9% in
April, continuing a downward trend that has been in place since May last
year, with only temporary interruptions. Moreover, the April reading
constitutes the lowest inflation level registered since July 1999.
Despite the fact that inflation reached a seven-year low, the current
inflation level is still above the 4.5% Central Bank inflation target, but
remains within the +/- 2.5% tolerance margin of the central target. As a
result of the improved inflationary backdrop, the Central Bank lowered the
benchmark SELIC interest rate for the seventh consecutive month from
16.50% to 15.75% on 19 April. Consensus Forecast participants anticipate
that consumer price pressures will moderate further this year with
year-end inflation expected to reach 4.6%, which is unchanged from last
month’s forecast figure. Next year, inflation is likely to remain at
virtually the same level, as Consensus Forecast participants expect
consumer prices to rise 4.4%.
Current
account surplus narrows amid deteriorating service balance
In the
first quarter, the current account balance incurred a surplus of US$ 1.8
billion. The surplus was well below the US$ 3.2 billion surplus observed
in the final quarter last year and the US$ 2.7 billion surplus observed in
the same quarter the previous year. A widening in the service balance
deficit, which deteriorated from a US$ 6.5 billion in the first quarter
2005 to a US$ 8.5 billion deficit, was only partially offset by a higher
trade surplus. In the first quarter, the trade surplus reached US$ 9.3
billion, which was up from the US$ 8.3 billion surplus figure of the first
quarter of 2005. Despite the continued appreciation of the currency,
export growth remained strong in the first quarter. Exports grew 20.2%
compared to the first quarter last year, which was virtually unchanged
from the 20.6% expansion observed in the previous quarter. Imports more
than doubled the growth pace registered in the final quarter last year and
moved from 10.6% year-on-year growth to a 24.2% expansion in the first
quarter. As a result of the first quarter reading, the annual current
account surplus dropped from US$ 14.2 billion in the fourth quarter to US$
13.3 billion. Consensus Forecast panellists anticipate exports to grow at
a slower pace this year, while imports will accelerate. As a result, the
annual trade balance will drop from US$ 44.8 billion in 2005 to US$ 39.0
billion and the current account surplus will narrow to US$ 7.7 billion
this year.
Currency strengthening
reflects improved public finances
In April, the exchange
rate appreciated 3.98% in nominal terms to reach 2.09 reais to the
US$. The April strengthening contrasted the 1.71% depreciation registered
in February and brought the currency to trade 21.2% stronger than a year
ago. The April currency strengthening partly reflects healthy public
finances, as the country registered the first consolidated budget surplus
in 11 months in March. The practically uninterrupted appreciation trend
observed since the end of 2004 has continued despite continued Central
Bank intervention in the currency markets to weaken the exchange rate.
Consensus Forecast participants expect the current appreciation trend to
reverse this year with the currency depreciating 8.2% from its current
level to reach 2.28 reais to the US$ by year-end. Next year,
Consensus Forecast panelists expect the exchange rate to depreciate 3.5%
to close at 2.36 reais to the US$. |
