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Industrial production grows at fastest pace in two years
In June, industrial production grew 6.6% over the same month
last year, which came in above both the previous month’s 4.9% result as
well as market expectations, which had predicted a 5.4% expansion. In
fact, the June reading marks the highest year-on-year growth since
December 2004. The June acceleration was driven by quicker growth in
tobacco and manufacturing output. The seasonally adjusted index
corroborates the positive reading, as industrial production increased
1.22% over the previous month. Furthermore, the trend in industrial
production continues to move upwards, as average growth climbed from 3.3%
in May to 3.9%, which represents the fastest pace in more than two years.
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%.
Outlook improves amid
strong domestic demand
In the first quarter of
2007, the economy grew at a resilient pace as it was bolstered by strong
domestic demand, which benefited from consistent interest rate cuts on the
part of the Central Bank. This strong backdrop and the favourable
interest rate environment is also pushing up business confidence. In
July, the business confidence index (ICI) reached a historic high, moving
up from 118.3 in June to 121.7. Thus, business confidence is well above
the 100-point threshold that marks the division between optimism and
pessimism and the new historic high suggests that investment will
accelerate in the coming months. In contrast, the consumer confidence
index (ICC) dipped from 109.1 in June to 108.2 in July. Despite the July
drop, consumers remain optimistic and the results point to continued
strong consumer spending in the coming months. Meanwhile, on the external
side of the economy, the strong real does not seem to be hurting
exports as the sector continues to strengthen, as evidenced by the growing
trade balance. Consensus Forecast participants anticipate the economy will
grow 4.5% in 2007, which is up 0.2 percentage points from last month’s
figure. Next year, the pace of economic activity should decelerate
slightly with growth reaching 4.3%, which is up 0.1 percentage points from
last month’s estimate.
Central Bank may move towards smaller rate cuts
In July, consumer prices rose 0.24%, which came in below the
0.28% increase registered in May but was in line with market expectations
of a 0.23% increase. Higher prices for food and beverages as well as
communication were the key drivers of the July price increase. Owing to
the moderate price change, annual headline inflation remained unchanged at
3.7%. At the current level, the inflation rate remains below the Central
Bank’s target of 4.5% but within the Bank’s 2.5% tolerance margin around
the target rate. On 18 July, the Central Bank decided to reduce its
benchmark SELIC target interest rate by 50 basis points to 11.50%. The
rate cut represents the 17th time since September 2005 that
monetary authorities have slashed rates and, as a result, interest rates
have reached a historic low. While the Central Bank is likely to continue
to ease monetary conditions, it may be moving away from the large interest
rate cuts observed in the past year towards smaller and more controlled
reductions. In fact, at the last meeting, the monetary policy committee (COPOM,
Comitê de Política Monetária) was split four to three regarding the
size of the cut. At the current juncture, a clear and precise picture of
the Central Bank’s course of action is difficult to obtain since inflation
is exposed to diverging factors. On the one hand, the strong real
is helping reduce inflation by keeping prices of imported goods low. On
the other hand, strong domestic demand is exerting upward pressure in the
short term. Nevertheless, despite the fact that nominal interest rates
are at a historical low, real interest rates are still among the highest
in the world, since they have not been lowered quickly enough to catch up
with the rapid decline in inflation. Consensus Forecast participants
expect inflation to close the year at 3.6%, which is up 0.1 percentage
points from last month’s forecast. For next year, Consensus Forecast
participants expect inflation to accelerate slightly to 3.8%
Current account surplus increases amid strong export growth
In the second quarter, the current account balance incurred a
surplus of US$ 2.6 billion. This reading represents a strong increase
from the US$ 1.7 billion surplus registered in the first quarter and more
than doubles the US$ 1.1 billion surplus from the same quarter a year
ago. The higher current account surplus reflects a strong improvement in
the trade surplus, which increased from US$ 8.7 billion in the first
quarter to US$ 11.8 billion in the second. Exports accelerated strongly
over the previous quarter (Q1: +15.5% year-on-year; Q2: +24.4% yoy).
Imports followed suit, although not as markedly, accelerating from 25.5%
annual growth in the first quarter to 27.8% in the second. In contrast,
the services and income account deficit increased from US$ 8.0 billion in
the previous quarter to US$ 10.2 billion. On an annual basis, the moving
annual current account surplus increased from US$ 13.4 billion in the
first quarter to US$ 15.0 billion.
Consensus
Forecast panellists anticipate exports growth will decelerate
significantly this year, while imports will moderate less notably. As a
result, the annual trade balance surplus is expected to drop from US$ 46.4
billion in 2006 to US$ 42.7 billion and likewise the current account
surplus is expected to shrink to US$ 11.7 billion this year. |
