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New methodology reveals
faster growth
On 28 March, the
National Statistical Institute (IBGE) revised the national accounts for
Brazil for the 1995-2006 period. IBGE has introduced a new methodology to
measure gross domestic product (GDP), which follows the United Nation’s
guidelines for its System of National Accounts. The new methodology
includes some major adjustments, mainly increasing the number of
industries considered to calculate economic growth. Hence, the new data
includes output in 56 industries compared to the 43 previously reported.
As a result, the contribution of the different sectors to the economy has
changed notably. The composition of the sectors changed significantly,
with the services sector now accounting for 66.7% of the economy, up from
the 56.3% before. Simultaneously, the weight of industry and agriculture
in the economy dropped, with industry falling from 36.1% to 27.7% and
agriculture from 7.7% to 5.6%. As a result of the methodological changes,
the economy expanded 4.8% in the final quarter of 2006, a full percentage
point above the 3.8% expansion reported previously. The new methodology
has also lifted full-year economic growth from 2.9% to 3.7% in 2006.
Faster growth can also be observed in domestic demand. In 2006,
investment expanded 8.7%, up from the 6.3% reported previously, whereas
consumption increased from 3.1% growth to 4.9%. According to the new
data, the external sector reduced its contribution to overall growth last
year, as imports maintained their resilient growth whereas exports growth
was revised downwards from 5.0% year-on-year to 4.6%. Due to the changes
applied to measure economic growth, Consensus Forecast panelists have
lifted their forecast for economic growth this year, with full-year growth
reaching 3.6%, 0.2% points up from last month’s forecast. For next years,
Consensus Forecast participants expect the economy to expand 3.6%.
Outlook
improves amid prospects of accelerating investment
The
outlook for the Brazilian economy has improved, as domestic demand is
showing signs of strengthening in the coming quarters. In March, the
industry confidence index improved over the previous month.
The business confidence
index (ICI) increased from 110.6 points in February to 115.8, the highest
mark in over two and a half years. Hence, business confidence remains
well above the 100-point threshold that marks the dividing line between
optimism and pessimism, suggesting that investment will continue to expand
in the months ahead. In addition, the appreciation of the real
persists, which implies a reduction in the relative price of capital goods,
thereby enhancing the chances of faster investment growth. On the other
hand, the consumer confidence index (ICC) fell 3.1 points over February to
107.8 points. In spite of the decline, the index remains above the 100-point
threshold that separates optimism from pessimism for the third consecutive
month, indicating that private consumption could pick up and become more
dynamic in the coming months. Preliminary data support the notion of
accelerating consumption. In January,
retail
sales growth surged from 5.6% annually in December to 8.5%. The January
reading confirms the accelerating trend observed in retail sales since
October last year, which was only briefly interrupted in December, and
indicates that the Central Bank’s monetary loosening is finally having an
effect on the economy. The trend should persist, as
lower interest rates
should boost consumer loans, which, in combination with rising wages,
should ignite private consumption. Consequently, strong growth in
domestic demand should compensate for a weaker external sector, whose
contribution to overall growth is set to diminish due to the persistent
appreciation of the local currency.
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. The consumer price index for March will be published on 11 April.
Consensus Forecast participants expect inflation to end the year at 3.8%,
which remains unchanged from last month’s forecast. For next year,
Consensus Forecast participants expect consumer prices to accelerate a
notch to 3.9%. |
