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Industrial production continues to accelerate
In March, industrial production increased 3.9% over the same
month the previous year, which surpassed the 3.0% expansion registered in
February and also came in slightly above market expectations of a 3.8%
rise. The March reading was mainly due to the acceleration observed in
manufacturing, automotive vehicles as well as in machinery and equipment
output, which was partly offset by a sharp contraction in electronic
materials and communications equipment. Furthermore, while production in
capital goods decelerated slightly over the previous month, output growth
in both intermediate and consumer goods accelerated. A month-on-month
comparison corroborates the quickening suggested by the annual figures, as
industrial production expanded 1.22% over February in seasonally adjusted
terms. Nevertheless, despite the March acceleration, the trend in
industrial production moderated for the second consecutive month, as
annual average growth edged down a notch from 2.8% in February to 2.6%.
Consensus
Forecast participants expect industry to continue recovering in the coming
months with full year growth reaching 4.3%, which is up 0.1% percentage
points from last month’s projection. Next year, the expansion in
industrial output is likely to remain unchanged at 4.3%.
Revision
of national accounts prompts a more optimistic outlook
As a
result of the National Statistical Institute’s (IBGE) revision of the
national accounts
for the 1995-2006
period, which revealed faster than expected growth during these years, the
prospects for the economy have improved notably.
The latest
indicators released for the real sector support the notion of an
accelerating economy. In April, the industry confidence index (ICI)
improved over the previous month.
The business confidence
index increased from 116.2 points in March to 120.7, the highest mark in
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 local currency remains strong, 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 2.1 points over February to 105.7
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. In February,
retail
sales growth increased from 8.5% annually in January to 9.4%. The
February 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. At the current level,
nominal interest rates are at a 20-year low, which suggests that
consumption growth should strengthen further.
Lower interest rates should boost consumer loans, which, in
combination with rising wages, should ignite private consumption. Strong
growth in domestic demand should compensate for a lower contribution from
the external sector, as the persistent appreciation of the real
will hamper growth in exports.
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 3.9%, 0.3 percentage points up from last month’s forecast. For
next years, Consensus Forecast participants expect the economy to expand
3.6
Inflation falls to an eight-year low
In March, consumer prices increased 0.37%, which was slightly
below the 0.44% rise registered in February and fell short of market
expectations, which had prices rising 0.40%. The March increase was broad
based as eight out of nine
groups comprising the price index increased compared to the previous month.
Higher prices for food and beverages underpinned March’s price rise. As a
result of the moderate monthly increase, annual headline inflation dropped
0.06 percentage points to 2.96%, marking the lowest annual inflation
observed in eight years. Inflation has followed a moderating trend since
2005, in part reflecting the persistent appreciation of the local currency,
which has cut the cost of imported goods and has therefore forced domestic
producers to keep prices low in order to remain competitive. At the
current juncture, 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. Most analysts expect the Central Bank to lower the
benchmark SELIC interest rate from 12.75% to 12.50% on the 17 April
monetary policy meeting. At the current level, nominal interest rates are
at a 20-year low. The Central Bank has lowered interest rates fourteen
consecutive months since September 2005. However, given the rapid decline
in inflation, real interest rates remain among the highest in the world.
Consensus Forecast participants expect inflation to quicken and close the
year at 3._%, which is down 0._ percentage points from last month’s
forecast. For next year, Consensus Forecast participants expect consumer
prices to accelerate slightly to 3._%.
Current
account narrows further
In the
first quarter, the current account incurred a surplus of US$ 1.7 billion.
The first quarter surplus was half the US$ 3.3 billion registered in the
previous quarter and constitutes the second consecutive quarter with a
shrinking current account surplus. Nevertheless, the first quarter
reading represents a slight improvement over the US$ 1.6 billion surplus
registered in the same quarter last year, which was mainly due to a
reduction in the services and income account deficit. The services and
income account deficit improved from US$ 8.6 billion in the first quarter
2006 to US$ 8.0 billion. In contrast, the trade balance surplus
deteriorated from US$ 9.3 billion in the first quarter last year to US$
8.7 billion, as exports decelerated more than in imports. Exports
moderated 1.0 percentage point from 16.4% growth in the fourth quarter to
15.4%, whereas imports slowed from 26.2% year-on-year growth in the fourth
quarter to 25.4%. Despite the first quarter reading, the annual current
account surplus inched up from US$ 13.3 billion in the fourth quarter 2006
to US$ 13.4 billion in the first quarter 2007. Consensus Forecast
panellists anticipate exports growth will decelerate significantly
this year, while imports will moderate less notably. As a result, the
annual trade balance will drop from US$ _._ billion in 2006 to US$ _._
billion and the current account surplus will shrink to US$ _._ billion
this year. |
