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Industrial production growth plummets
In December, industrial production increased a meagre 0.4%
over the same month the previous year, which was well below the 4.2%
expansion registered in November and also came in below market
expectations of a 0.8% rise. The December reading constitutes the second
lowest growth rate registered since June last year. Contractions in
electronic materials and computer equipment as well as in food and
clothing manufacturing almost entirely mitigated the healthy growth
observed in mining, beverages and office equipment output. Furthermore,
production growth decelerated in consumer, capital and
intermediate goods. The December slowdown mainly reflects a further
appreciation of the local currency, which has made imports even cheaper
and has thus reduced the demand for domestic goods. As a result of the
sluggish growth observed in December, annual average growth edged down a
notch to 2.8% from 3.0% in November, putting an end to the positive growth
trend initiated last June. Nevertheless, a month-on-month comparison does
not corroborate the slowdown suggested by the annual figures, as
industrial production expanded 0.54% over November in seasonally adjusted
terms.
Consensus Forecast participants expect industry to recover notably in the
coming months with full-year growth reaching 4.0%, which is up 0.1
percentage points from last month’s projection. Next year, the expansion
in industrial output is likely to accelerate further to 4.3%.
Outlook
optimistic despite prospects of a slowdown in the external sector
The
economy is showing signs of pacing up in the coming quarters. In the
political arena, on 22 January President Lula da Silva announced the
so-called Accelerated Growth Program in a bid to double economic growth
through cuts in corporate taxes and higher spending in infrastructure.
Authorities expect that higher spending on infrastructure by both private
and public companies will boost economic growth and eventually boost tax
collection. In addition, positive developments in the economy suggest that
the Central Bank’s monetary loosening is reviving domestic demand, which
is likely to support overall economic growth in the coming quarters.
Lower interest rates are fuelling consumer loans, which, in
combination with rising wages, are boosting private consumption. In
November, retail sales increased 9.2% over the same month the year before.
Furthermore, unemployment continued to decrease and hit a one-year low in
December, as the unemployment rate plunged to 8.4% from 9.5% in November.
Finally,
international rating agency Fitch revised the outlook of the country’s
foreign currency rating from stable to positive, following on a previous
decision by Standard and Poor’s, which had revised Brazil’s outlook to
positive in November. Nevertheless, the persistent appreciation of the
local currency is having some negative effects on the economy. In
January, the trade surplus narrowed to US$ 2.5 billion, the lowest surplus
registered in two years. Cheaper imports are also affecting the local
industry and in December, industrial production increased a meagre 0.4%
over the same month the year before.
Consensus
Forecast participants anticipate the economy will grow 3.5% in 2007, which
is unchanged from last month’s figure. Next year, the pace of economic
activity should accelerate slightly with growth reaching 3.6%, which is up
0.1 percentage points from last month’s estimate.
Inflation rate drops to lowest level in seven years
In January, consumer prices increased 0.44%, which was
slightly down from the 0.48% increase registered in December and also came
in below market expectations of a 0.47% price rise. January’s price surge
was broad-based as eight out of nine
groups comprising the price index increased compared to the previous month.
Higher prices in food and transport were the main drivers behind January’s
price increase. Despite January’s price rise, annual headline inflation
dropped from 3.1% in December to 3.0%. This constitutes the lowest annual
inflation rate observed since 1999. At the moment, inflation remains well
below the 4.5% Central Bank target for 2007 but within the lower end of
the Bank’s ±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 24 January, the Central Bank lowered the benchmark
SELIC interest rate from 13.25% to 13.00%. At the current level, interest
rates are at a 20-year low. The Central Bank has lowered interest rates
thirteen consecutive months since September 2005. 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. Consensus Forecast participants expect
inflation to close the year at 3.9%, which is unchanged from last month’s
forecast figure. For next year, Consensus Forecast participants expect
inflation to remain unchanged at 3.9%, which is down 0.1 percentage point
from last month’s figure.
Current
account narrows in fourth quarter
In the
fourth quarter, the current account incurred a surplus of US$ 3.3
billion. The surplus was less than half the US$ 7.5 billion surplus
registered in the previous quarter but slightly exceeded the US$ 3.1
billion surplus observed in the same quarter the year before. The
improvement over the same quarter the year before mainly reflects positive
developments in the transfer balance which edged upwards from US$ 1.0
billion to US$ 1.1 billion. The trade balance registered a surplus of US$
11.5 billion, which was virtually unchanged compared to the surplus
observed in the last quarter of 2005. Exports maintained a healthy growth
pace despite decelerating in the fourth quarter to 16.4% from 20.5% in the
previous quarter. Due to the current strength of the currency, which
appreciated against the US$ for the fourth consecutive year, imports
continued growing at a resilient pace and even picked up to 29.4% from the
22.8% annual expansion registered in the third quarter. As a result of
the fourth quarter reading, the annual current account surplus inched up
from US$ 13.3 billion in the third quarter to US$ 13.5 billion in the
fourth. Consensus Forecast panellists anticipate growth in both
exports and imports will decelerate slightly this year. The annual trade
balance will decrease from US$ 46.1 billion in 2006 to US$ 39.9 billion
whereas the current account surplus will shrink to US$ 7.2 billion this
year. |
