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Growth picks up in
third quarter
In the third quarter,
gross domestic product (GDP) increased 3.2% over the same quarter last
year, which was up from the paltry 1.2% reading observed in the previous
quarter and almost in line with the 3.4% estimate published in last month’s
Consensus Forecast. A pick-up in investment was the main reason for the
overall acceleration, however, stronger export growth also contributed to
the faster pace. Investment added 6.3% over the same period last year,
more than doubling the 2.9% growth pace observed in the second quarter.
Public consumption also picked up slightly, but was offset by weaker
private consumption growth. On the external side of the economy, exports
turned a 0.6% decline in the second quarter, to a 7.5% expansion in the
third. Imports also picked up the pace, moving from 12.1% growth in the
second quarter to a 20.0% increase in the third. On a sectoral basis,
faster growth in agriculture and construction drove the third quarter
acceleration, which was underpinned by positive growth in all sub-sectors
except for communications.
A
quarter-on-quarter comparison does not fully corroborate the acceleration
suggested by the annual figures. According to seasonally adjusted data,
economic activity grew 0.49% over the second quarter, which was slightly
above the 0.41% second quarter reading and the average 0.42%
quarter-on-quarter growth pace recorded throughout the past year.
Government
lowers growth forecast
The economy picked up
slightly in the third quarter, on the back of healthy investment growth.
Moreover,
President Luiz
Inácio Lula da Silva, who secured a second term in office in the 29
October run-off elections, remains determined to double the economic
growth pace in the coming years. On 21 November, the president stated
that he will focus on resuming stalled infrastructure projects in the
remaining two months of the year, in order to boost growth. Moreover, the
president said he will propose changes to some environmental laws, which
are currently hampering the implementation of various infrastructure
projects. The size of the country combined with shortcomings in
infrastructure is one of the main bottlenecks to faster growth.
Previously, on 14 November, Finance Minister Guido Mantega presented eight
measures aimed at boosting growth to 5% annually, in order to fulfil
Lula’s electoral pledges. Mantega suggested measures such as tax cuts and
redirecting government funds to infrastructure projects in order to fuel
economic growth. In addition, Mantega mentioned the possibility to raise
tax exemptions to attract more private investments. Meanwhile,
unemployment dropped from 10.0% in September to 9.8% in October, which
constituted the third consecutive decline and marked the lowest level
since January this year. Increasingly favourable labour market conditions
combined with easing interest rates are providing an improved backdrop for
domestic demand, which should support growth in the coming quarters.
Furthermore, on 22 November, international rating agency Standard & Poor’s
upgraded the outlook of the country’s foreign currency rating from stable
to positive, as a result of the steady decline in the country’s fiscal and
external vulnerabilities and indications that the government will continue
to reduce fiscal inflexibilities. Nevertheless, as a result of sluggish
growth in the past months, on 24 November, the government cut its growth
forecast for this year from 4.0% to 3.2%. The Central Bank is a notch
more optimistic and expects the economy to grow 3.5% for the full year.
Consensus Forecast participants side with the government and expect the
economy grow 3.1% for the full-year, which is down 0.1 percentage points
from last month’s figure. Next year, the pace of economic activity should
accelerate slightly with growth reaching 3.5%, which is up 0.1 percentage
points from last month’s estimate.
Inflation continues on moderation track
In October, consumer prices increased 0.33%, which was up
from the 0.21% increase observed in September, but bang in line with the
0.33% Consensus Forecast projection from last month. Higher food,
clothing and personal expenditure prices drove the October price increase.
The October reading is the highest price rise observed since March this
year and constitutes the second consecutive month of accelerating prices.
Nevertheless, despite the October increase, annual headline inflation
dropped from 3.7% in September to 3.3%, marking the lowest level since
June 1999 and continuing a downward trend that has been in place virtually
uninterrupted since the middle of last year. As a consequence, inflation
remains well below the 4.5% Central Bank target for this year but within
the ±2.5% tolerance margin. In the light of the benign inflationary
developments in recent months, the Central Bank has continued to loosen
monetary policy. On 29 November, the Central Bank lowered the benchmark
SELIC interest rate for the twelfth consecutive time from 13.75% to
13.25%. At the current level, interest rates are at a 20-year low.
However, given the rapid decline in inflation, real interest rates remain
among the highest in the world. Nevertheless, monetary officials have
indicated that they might wait to reduce interest rates further and
observe the lagged effects of monetary easing on the economy. Consensus
Forecast participants expect inflation to drop further to 3.1% by the end
of the year, which is unchanged from last month’s forecast figure. Next
year, inflation is likely to accelerate slightly, as Consensus Forecast
participants expect consumer prices to rise 4.0%, which is down
0.1percentage point from last month’s figure. |
