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Industrial production shows mixed results
In April, industrial production grew 6.0% over the same month
last year, which was far above the previous month’s 3.9% expansion. The
April reading was driven by an acceleration in tobacco and manufacturing.
Nonetheless, the seasonally adjusted index does not corroborate the
acceleration, as industrial production contracted 0.08% over the previous
month, coming in far below market expectations of a 0.9% increase. That
said, the trend in industrial production turned around with annual average
growth climbing from 2.6% in March to 3.3%, which constitutes the fastest
pace in over a year. Consensus Forecast participants expect industry to
continue recovering in the coming months with full year growth reaching
4.3%, which is unchanged from last month’s projection. Next year,
panellists anticipate the expansion in industrial output to increase to
4.4%.
Lower interest rates
key to future growth
Since 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 business confidence index (ICI) dropped from the
two year high of 120.7 registered in April to 118.2 in May. Nonetheless,
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,
consumers are becoming increasingly optimistic. In May, the consumer
confidence index (ICC) gained 2.8 points over April to 108.5 in May,
indicating that private consumption will continue to pick up further speed
from a strong first quarter. In March, retail sales grew 12.8%, following
on an even more resilient 15.3% expansion in February, which represented
the fastest pace in six months. Interest rates are currently at an all-time
low, which is bolstering consumption growth. On the downside, the
external sector is dragging down economic growth, as the persistent
appreciation of the real is hampering growth in exports. Consensus
Forecast participants anticipate the economy will grow 4.2% in 2007, which
is up 0.3 percentage points from last month’s figure. Next year, the pace
of economic activity will maintain the same rhythm, growing at 4.1%, which
is up 0.2 percentage points from last month’s estimate.
Central Bank lowers interest rates as inflation remains moderate
In May, consumer prices increased 0.28%, which was slightly
above the 0.23% rise registered in April but well below market
expectations of a 0.55% increase. The reading was broad-based as eight of
the nine categories constituting the price index increased compared to the
previous month. Higher prices for personal goods and clothing spurred the
price rise. Despite the subdued monthly reading, annual headline
inflation picked up from 3.0% in April to 3.2%. Inflation has continued
along the moderating trend started in 2005, in part, owing to the
persistent appreciation of the currency versus the US$, which has kept
import prices low and compelled domestic producers to follow suit in order
to stay competitive. Currently, inflation remains well below the Central
Bank’s target of 4.5% but within the Bank’s ±2.5% tolerance margin. On 6
May, the benign inflationary situation prompted the Central Bank to lower
its headline interest rate by 50 basis points to a record low 12.0%.
Since September 2005, the Central Bank has systematically cut interests
rates from the then high of 19.75%. Despite these ongoing cuts of the
nominal interest rates, real interest rates remain among the highest in
the world, given the rapid decline in inflation. Real interest rates may
decline however, if inflation accelerates again as expected by the market.
Consensus Forecast participants expect inflation to close the year at
3.6%, which is down 0.1 percentage points from last month’s forecast. For
next year, Consensus Forecast participants expect consumer prices to
accelerate slightly to 3.9%. |
