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Industrial production expands faster than expected
In November, industrial production increased 4.2% over the
same month the year before, which was down from the 4.9% expansion
registered in October but well above market expectations of a 3.0%
increase. Textile and metal products output contracted over November 2005
and thus compensated for robust growth in mining, beverages and
pharmaceuticals, prompting the moderate slowdown. Furthermore, while
intermediate goods production almost doubled, both capital and consumer
goods output decelerated compared to October. A month-on-month comparison
does not corroborate the slowdown suggested by the annual figures, as
industrial production expanded 0.77% over October in seasonally adjusted
terms. Moreover, the trend is pointing upwards. Annual average growth
moved up, from the 2.7% registered in October to 3.0%, which constitutes
the strongest growth pace since March 2006.
Consensus Forecast
participants estimate industrial sector to have recovered further in the
final month of 2006 to full-year growth of 3.2%, which is 0.2
percentage points down from last month’s projection. This year,
industrial output is likely to accelerate to 3.9%.
Domestic
demand driven growth suggests a more optimistic outlook for 2007
Recent
indicators suggest that the Central Bank’s monetary loosening is beginning
to revive domestic demand, which is likely to support overall economic
growth in the coming quarters.
On 29 November, the
Central Bank lowered the benchmark SELIC interest rate from 13.75% to
13.25%, the lowest nominal level registered in over twenty years. Lower
interest rates are fuelling consumer loans, which, in combination with
rising wages, are boosting private consumption. In October, retail sales
increased 7.0% over the same month the year before, following the positive
trend initiated in August. Cheaper credit also paved the way for higher
motor vehicle sales in December, which increased 12.4% over the same month
the year before. Stronger consumption is, in turn, stimulating the
domestic industry. In October, industrial production expanded 4.8% from
the year earlier, marking the highest increase of the last five months.
Furthermore,
unemployment dropped from 9.8% in October to 9.5% in November,
constituting the fourth consecutive decline and marking the lowest level
since January this year. Meanwhile, President
Luiz Inácio Lula da Silva
initiated his second term in office on 1 January amid pledges to unlock
Brazil's economic growth potential without reneging on fiscal discipline
or social welfare programs. On 3 January, the government announced plans
to increase spending on infrastructure in a bid to bolster economic growth.
Hence, Brazil’s 2007 budget, which was approved on 22 December, includes a
primary surplus equal to 4.3% of gross domestic product (GDP) and allows
the government to use as much as 0.2% of that amount, or 4.6 billion
reais (US$ 2.2 billion), to fund infrastructure projects. Next to
accelerating private consumption and government investment, the external
sector is also likely to constitute an important pillar for economic
growth this year. Brazil’s 2006 trade surplus reached an all time high as
strong global demand for Brazilian goods boosted exports earnings. The
Central Bank estimates the economy to have grown 3.0% in 2006 and sees
economic growth accelerating to 3.8% this year.
Consensus
Forecast participants side with the CB/government and estimate the economy
to have grown 3._% in 2006, which is up/down 0._ percentage points from
last month’s figure. This year, the pace of economic activity should
accelerate slightly with growth reaching 3._%, which is up/down 0._
percentage points from last month’s estimate.
Inflation continues to decline in November
In November, consumer prices increased 0.31%, which was
virtually unchanged compared to the 0.33% increase registered in October
and below market expectations of a 0.35% price rise. While slightly below
market expectations, the November reading constitutes the second highest
monthly price increase observed since March last year. Lower prices for
food, education and housing were more than offset by higher transportation
prices. Despite the November reading, annual headline inflation dropped
from 3.3% in October to 3.0%, marking the lowest level since June 1999 and
continuing a downward trend that has been in place virtually uninterrupted
since May 2005. Hence, inflation remained well below the 4.5% Central
Bank target for 2006 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 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. In spite of the high real interest rates, monetary
authorities have indicated that they may reduce interest rates less
markedly than in the past. The Central Bank has lowered interest rates
twelve consecutive times since September 2005. The next monetary policy
meeting is scheduled for 23-24 January. Consensus Forecast participants
expect inflation to have moved up a notch to 3.1% by the end of 2006,
which is unchanged from last month’s forecast figure. This year,
inflation is likely to accelerate slightly, as Consensus Forecast
participants expect consumer prices to rise 3.9%, which is down 0.1
percentage point from last month’s figure. |
