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Economic activity paces
up in first quarter
In the first quarter,
gross domestic product (GDP) increased 3.4% over the same quarter last
year, which was well above the 1.4% expansion registered in the previous
quarter and also exceeded market expectations which had the economy
growing at 3.2%. In fact, the first quarter reading constitutes the third
consecutive quarter of accelerating growth. Domestic demand accounted for
the acceleration in the first quarter amid a very strong investment
expansion and a pick-up in consumption due to declining interest rates.
However, the contribution of the external sector diminished despite a
slight acceleration in exports, as import growth more than tripled
compared to the previous quarter. On a sectoral basis, the industrial
sector accounted for the lion share of the acceleration, offsetting
continued negative growth in the agricultural sector.
A
quarter-on-quarter comparison corroborates the acceleration suggested by
the annual figures. According to seasonally adjusted data, economic
activity grew 1.39% over the preceding quarter.
Strong first quarter
growth bolsters optimism ahead of October presidential elections
The stronger than
expected first quarter expansion bodes well for growth prospects this year.
Domestic demand, which drove the acceleration in the first quarter, will
continue constituting an important driver to economic growth this year,
boosted by the current monetary policy easing. Despite indications in the
April monetary policy meeting that the Central Bank may slow pace of
interest rate cuts this year, the Bank continued lowering the benchmark
Selic rate in May. As a result of the healthy developments in the first
quarter, Finance Minister Guido Mantega stated on 31 May that he will keep
the projection of economic growth at 4.5% this year, which is almost
double the pace registered last year. In the meantime, concerns that the
country will fail to meet fiscal targets this year amid increased
government spending ahead of elections eased as the public sector recorded
a higher than expected primary surplus in April. The public sector
primary surplus, which works as a gauge of government’s ability to service
debt and control expenditures, reached 4.54% of GDP for the twelve months
ending in April, up from the 4.40% registered in March and above the
government’s 4.25% annual target. An additional indicator of increasingly
healthy fundamentals was a 5 June government announcement to buy back
euro-, and dollar denominated bonds as a part of an effort to reduce the
country’s external debt. The transactions will take place between the 5
and 8 June.
Six months
ago, the finance ministry retired the entire US$ 15.5 billion in
outstanding debt due to the International Monetary Fund (IMF). Finally,
as a result of recent healthy economic developments, President
Luiz Inácio Lula da
Silva is widening the lead in the polls for the upcoming October
presidential elections. According to a June poll conducted by pollster
company Ibope, Lula would obtain 48% of the votes (March poll: 43%),
compared to his main opponent Geraldo Alckmin from the Brazilian Social
Democracy Party, who would receive 18% of the votes (March poll: 19%).
Consensus Forecast panellists are also optimistic about this year’s growth
and expect economic activity to accelerate throughout this year, with
full-year reaching 3.5%, which is unchanged from last month’s Consensus
Forecast figure and below the 4.5% government estimate. Next year, the
pace of economic activity should accelerate moderately with growth
reaching 3.6%.
May
registers modest price increase
In May,
consumer prices increased 0.10%, which was down from the 0.21% increase
registered in the previous month and below market expectations of 0.15%.
Higher clothing and health prices were partly offset by declining
household good and transport prices, which prompted the moderate May
reading. As a result of the subdued May price rise, annual headline
inflation dropped from 4.6% in April to 4.2%, continuing a downward trend
that has been in place since May last year, with only temporary
interruptions. Moreover, the May reading constitutes the lowest inflation
level registered since June 1999. Due to the positive price developments
in May, inflation dropped below the 4.5% Central Bank target for this
year, 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 eight consecutive
month from 15.75% to 15.25 on 31 May, marking a five year low. Consensus
Forecast participants anticipate that consumer price pressures will remain
moderate this year with year-end inflation expected to reach 4.5%, which
is down 0.1 percentage points 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%, which
is unchanged from last month’s figure.
Currency weakens
sharply in May
In May, the exchange
rate depreciated 9.18% in nominal terms to reach 2.30 reais to the
US$, which contrasted the 3.97% appreciation registered in April. The May
figure represents the second weakening in the currency since December last
year and constitutes an exception in a virtually uninterrupted
appreciation trend observed since the end of 2004, despite Central Bank
and government efforts to
weaken the
exchange rate.
As a result of the May depreciation, the currency is trading only
3.4% stronger than May last year, compared to a 21.2% year-on-year
appreciation last month. The May depreciation was the result of volatile
trading. The currency had strengthened to a five-year high on 10 May,
which prompted the Central Bank to purchase about US$ 6.3 billion
on the
spot foreign exchange market
in the first ten days of the month. However, concerns about higher U.S.
interest rates in the wake of higher inflation prompted the currency to
loose ground at a rapid pace. As a result, monetary authorities
intervened at the end of the month to calm the market. On 30 May, the
Central Bank sold US$ 400 million of currency swaps for the first time in
more than two years to curb the weakening of the currency. An additional
US$ 400 million of currency swaps was auctioned on 31 May.
In May,
active Central
Bank intervention raised international reserves by US$ 6.8 billion –
lifting the amount to US$ 63.4 billion. Consensus Forecast participants
expect the currency to appreciate 1.8% from its current level to reach
2.26 reais to the US$ by year-end. Next year, Consensus Forecast
panelists expect the exchange rate to depreciate 3.4% to close at 2.34
reais to the US$. |
