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Economic activity
continues positive growth trend
In the final quarter of
2006, gross domestic product (GDP) added 3.8% over the same quarter the
previous year. The fourth quarter reading was slightly above last month’s
3.6% Consensus Forecast and exceeded the 3.2% expansion registered in the
previous quarter. In fact, the fourth quarter reading constitutes the
highest expansion registered in one and a half year. Domestic demand
drove the fourth quarter’s acceleration, which was partly offset by weaker
external demand. Investment expanded 6.9% annually, which was up from the
6.3% growth observed in the third quarter. Both public and private
consumption also quickened compared to the previous quarter, with global
consumption accelerating to 3.6% annually (Q3: + 3.0% yoy). In contrast,
the external side of the economy reduced its contribution to overall
economic growth as exports plummeted and imports accelerated.
Exports growth dropped to 4.3% (Q3: +7.5% year-on-year), whereas imports
resumed the robust growth pace observed in the third quarter and
accelerated to 23.7% (Q3: +20.0% yoy). On a sectoral basis, faster growth
in both mining and manufacturing drove the fourth quarter acceleration,
which was partly mitigated by slower growth in construction and
agriculture.
A
quarter-on-quarter comparison corroborates the acceleration suggested by
the annual figures. According to seasonally adjusted data, economic
activity grew 1.10% over the third quarter, which was up from the 0.49%
third quarter reading.
As a result of the
fourth quarter reading, the full-year growth rate reached 2.9% last year,
which was above the 2.3% growth registered in 2005.
Outlook
deteriorates amid weak domestic demand
Recent
indicators suggest that the Central Bank’s monetary loosening is failing
to revive domestic demand.
Lower interest rates
should boost consumer loans, which, in combination with rising wages,
should ignite private consumption. Nevertheless,
in December, retail sales growth plummeted from 9.0% annually in November
to 5.7%, breaking the positive growth developments initiated in
October. Cheaper credit also failed to stimulate motor vehicle sales
in February, which decreased 0.40% over January.
Furthermore, weaker
consumption also seems to be affecting the domestic industry. In January,
industrial production declined a seasonally adjusted 0.3 percentage points
over the previous month, marking the first contraction in industrial
output since September 2006.
In
addition, the unemployment rate surged to 9.3% in December from 8.4% in
January. However, while the reports indicate a weakening of domestic
demand in the months ahead, recent trade data suggest a recovery in the
external sector. In February, Brazil’s trade surplus widened to
US$ 2.9 billion from US$ 2.5 billion in January, as higher prices for the
country’s commodities are bolstering exports gains. The February reading
suggests that, despite the negative effects caused by persistent
appreciation of the Brazilian real, strong global demand for
Brazilian goods will boost exports and thereby enhance the external
sector’s contribution to economic growth. Consensus Forecast participants
anticipate the economy will grow 3.4% in 2007, 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 3.6%,
which remains unchanged from last month’s estimate.
Inflation remains unchanged
In February, consumer prices added 0.44%, which was unchanged
from January’s price rise. The February increase came in slightly above
market expectations, which had prices rising 0.42%. Price declines in
clothes and communication were not enough to compensate for higher prices
in housing, education and food. In particular, education prices surged in
February due to the introduction of new fees at the beginning of the
school year. However,
despite February’s
price rise, annual headline inflation remained unchanged at 3.0%, which
constitutes a seven-year low. At the current level, 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
inflation developments in recent months, the Central Bank has continued to
loosen monetary policy. On 7 March, the Central Bank lowered the
benchmark SELIC interest rate from 13.00% to 12.75%. The Central Bank has
lowered interest rates fourteen consecutive months since September 2005
and rates have reached the lowest level in 20 years. However, given the
rapid decline in inflation, real interest rates remain among the highest
in the world. Consensus Forecast participants expect inflation to end the
year at 3.8%, which is down 0.1 percentage points from last month’s
figure. For next year, Consensus Forecast participants expect consumer
prices to accelerate to 3.9%. |
