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Industrial production moderates
In August, industrial production increased 3.2% over the same
month last year, which was down from the 3.5% reading registered in July
and below last month’s Consensus Forecast estimate of 3.8%. Strong growth
in the medical equipment and furniture sectors was partly offset by
declines in the pharmaceutical as well as metal products output.
Furthermore, while intermediate goods maintained virtually the same growth
pace seen in July, both capital and consumer goods output decelerated
compared to last month. However, a month-on-month comparison does not
confirm the slowdown suggested by the annual figures, as industrial
production expanded 0.71% over July in seasonally adjusted terms. That
said, owing to the August deceleration, the annual average growth rate
remained at the 2.2% level registered in July, which, apart from the lower
June reading, constitutes the slowest pace in industrial production since
March 2004. Nevertheless, Consensus Forecast participants expect industry
to recover notably in the remainder of the year with full-year growth
reaching 3.8%, which is down 0.4 percentage points from last month’s
projection. Next year, the expansion in industrial output is likely to
accelerate slightly to 4.1%.
Lula fails to win
absolute majority in first round presidential elections
Overshadowed by
corruption allegations, President Luiz Inácio Lula da Silva did not manage
to receive the necessary votes to win the presidential elections in a
first round on 1 October. Despite recent polls indicating a first round
victory for Lula, political scandals that surfaced in the last week before
the elections triggered substantial vote losses in the ballots. Lula, who
represents the workers party (PT,
Partido dos
Trabalhadores)
received 48.6% of the votes and thereby failed to garner the absolute
majority. The main opposition candidate, Geraldo Alckmin, from the Social
Democracy Party (PSDB, Partido da Social Democracia Brasileira) did
better than expected and received 41.6% of the votes. Although Lula
remains the favourite candidate and is likely to win the 29 October run-off
elections, congressional support for the president has diminished in the
congressional elections. According to preliminary results, the centrist
Party of Brazilian Democratic Movement (PMDB, Partido do Movimento
Democrático Brasileiro) gained 89 seats of the 513 in the lower house,
raising its
share of total seats to 17.3% from 14.4% in the last elections. Lula’s
party, Workers' Party (PT,
Partido dos
Trabalhadores),
gained 83 seats, lowering its share of total seats from 17.6% to 16.2%.
Geraldo Alckmin’s Brazilian Social Democracy Party (PSDB, Partido da
Social Democracia Brasileira) gained 65 seats in the lower
house, also lowering the share of total seats from 14.4% to 12.7%. In
total, the chamber of deputies counts 322 pro-government members versus
191 from the opposition. The distribution of seats should quell fears
that Lula faces an ungovernable Congress if re-elected for a second term.
Sufficient congressional support is essential for Lula, in order to
fulfil pledges
to boost economic growth and to reform the tax and social security systems.
Authorities expect economy to pick up in second half of the year
The
economy decelerated in the second quarter, as investments slowed and the
volume of exports declined for the first time in three years.
Nevertheless, despite the second quarter slowdown, both the government and
the Central Bank remain optimistic about growth prospects for the
remainder of the year. Since August last year, the Central Bank has been
easing monetary policy, cutting interest rates to the lowest levels in
more than twenty years and creating an increasingly favourable backdrop
for sound domestic demand recovery. Moreover, on 15 September, a Central
Bank official stated that there is even room for additional interest rate
cuts, as a strengthening currency is helping to curb inflation.
Consequently, on 18 September, the Central Bank
stated that it expects
economic growth to pick up in the third quarter, claiming that the
slowdown in the second quarter was only temporary. Monetary authorities
pointed out that the full effects of interest rate cuts have not yet
kicked in and that favourable interest rates will bolster the economy in
the coming months. Despite increasing optimism for the third quarter, the
Central Bank cut its forecast for full-year growth on 28 September from
the previous 4.0% to the actual 3.5%. The cut reflects the second quarter
slowdown in investment and exports, which is already affecting the labour
market. In August, unemployment remained virtually unchanged at 10.6%
compared to the 10.7% rate registered in July, which had marked the
highest unemployment rate since April last year.
Higher
unemployment levels could hamper private consumption in the months ahead,
which is the only component of GDP that remained healthy in the second
quarter. However, next year, consumption could experience a boost, as the
government seeks to increase public spending 9.5% nominally to finance
higher public sector wages, health care and infrastructure projects. In
August, the moving annual public sector deficit had moved down a notch
from 3.6% of GDP in July to 3.5%, however, the deficit remains above the
full-year level of the last two years. Nevertheless, the primary surplus
(the budget balance before interest payments) that
works as a gauge of
government’s ability to
service debt and control expenditures, widened to 4.47% of GDP for the
twelve months ending in August, remaining above the government’s 4.25%
annual target. In its assessment of the economy, the government is
slightly more optimistic than the Central Bank and expects the economy to
grow 4.0% for the full year. Consensus Forecast participants do not share
the government’s optimism and expect the economy to rebound in the third
quarter but to grow only 3.3% for the full-year, which is down 0.2
percentage points from last month’s figure. Next year, the pace of
economic activity should accelerate slightly with growth reaching 3.5%,
which is down 0.1 percentage points from last month’s estimate.
Inflation continues to moderate
In September, consumer prices increased 0.21% over the
previous month, which was up from the 0.05% increase registered in August
but below last month’s Consensus Forecast estimate of 0.31%. Prices
increased as higher housing and clothing prices were only partly offset by
declining household equipment prices. Despite the September price rise,
annual headline inflation dropped from 3.8% in August to 3.7%, marking the
lowest level since June 1999 and continuing a downward trend that has been
in place virtually uninterrupted since May last year. Consequently, the
September inflation rate remains well below the 4.5% Central Bank target
for this year but within the ±2.5% tolerance margin. As a result of the
favourable price developments observed in recent months, the Central Bank
has continued to loosen monetary policy. On 30 August, the Central Bank
lowered the benchmark SELIC interest rate for the tenth consecutive time
from 14.75% to 14.25%, the lowest rate in 20 years. Moreover, given the
benign inflationary environment, monetary authorities are likely to
continue to lower interest rates. The next monetary policy meeting will
be held from 17 to 18 October. Consensus Forecast participants expect
inflation to drop to 3.4% by the end of the year, which is down 0.5
percentage points from last month’s forecast figure. Next year, inflation
is likely to accelerate slightly, as Consensus Forecast participants
expect consumer prices to rise 4.2%, which is down 0.2 percentage points
from last month’s figure.
Currency sees strongest
depreciation in four months
In September, the
exchange rate depreciated 1.63% in nominal terms to reach 2.17 reais
to the US$. The September weakening contrasted the 1.75% appreciation
observed in August and constitutes the strongest depreciation since May
this year. The currency has been appreciating with only temporary
interruptions since the end of 2004. As a result of the September
depreciation, the currency is now trading a mere 2.2% stronger than in
September last year, well down from the 10.5% year-on-year appreciation
observed last month. The currency strengthened at the beginning of the
month, but uncertainty ahead of the presidential elections prompted the
currency to weaken. However, the currency recovered in the first week of
October and on 6 October, the currency had appreciated 0.49% in nominal
terms compared to the end of September, to reach 2.16 reais to the
US$. After announcing changes to the current exchange rate regime in July,
on 16 September, Finance Minister Guido Mantega stated that the country
has no plans to further change exchange rate rules. The change announced
in July allows exporters to keep 30% of their export earnings abroad.
Previous to the change, companies had been required to repatriate US$
earned through exports and convert them into reais no later than
210 days following the export. Consensus Forecast participants expect the
currency to depreciate to 2.22 reais to the US$ by year-end, which
translates into a 5.5% annual appreciation. Next year, Consensus Forecast
panelists expect the exchange rate to depreciate 4.2% to close at 2.32
reais to the US$. |
