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Economy
grows at fastest pace in three years
In the
second quarter, gross domestic product (GDP) added 5.4% over the same
quarter last year. The figure came in ahead the previous quarter’s
reading of 4.4% (previously reported: +4.3% year-on-year), but was in line
with last month’s Consensus Forecast estimate of 5.3% growth. Favourable
results in domestic demand helped propel the economy to buoyant growth.
Investment expanded at the fastest pace in more than three years, adding
13.8% annually (Q1: +7.3% yoy), powered by historically low interest
rates. In contrast, consumption decelerated from 5.5% in the first
quarter to 5.3%. The external side of the economy continues to improve
its contribution to overall growth. In particular, export growth soared
from 5.9% in the previous quarter to 13.0%. Imports, in contrast,
decelerated as growth declined from 20.0% to 18.7%. At the sector level,
faster growth in industry as well as services was responsible for the
second quarter’s reading. Industry expanded 6.8% annually (Q1: +%3.0 yoy),
the fastest rate since 2004. A quarter-on-quarter comparison does not
corroborate the acceleration suggested by the annual figures. According
to seasonally adjusted date, economic activity grew a moderate 0.81% over
the previous quarter. Furthermore, the second quarter’s pace is down from
the 0.90% expansion registered in the first quarter.
Outlook continues to
improve
After expanding at the
fastest pace in three years in the second quarter, the economy remains
poised for a strong second half of the year. The strong backdrop and
favourable interest rate environment are bolstering business confidence.
In September, the business confidence index (ICI) reached a new historic
high for the third consecutive month nudging up from 121.8 points in
August to 123.1. Thus, business confidence remains well above the 100-point
threshold that separates optimism from pessimism. The reading suggests
that investment will accelerate in the coming months. In contrast, the
consumer confidence index (ICC) slipped slightly from 109.3 points in
August to 109.0. Despite this deterioration, the index indicates that
consumers remain optimistic and thus, private consumption is likely to be
strong in the remainder of the year. Along the same line, August retail
sales increased 5.5% over the same month last year. Furthermore, the
strong real does not seem to be hurting exports, which reached a
record US$ 43.4 billion in the third quarter.
Consensus Forecast
participants share the Central Bank’s view and anticipate the economy will
grow 4.7% in 2007, which is up 0.1 percentage points from last month’s
figure. Next year, the pace of economic activity should decelerate
slightly with growth reaching 4.3%, which is unchanged over last month’s
estimate.
Central Bank cuts rates at slower pace
In August, consumer prices rose 0.47% over the previous month,
which almost doubled the 0.24% increase registered in July. The reading
came in line with market expectations, which had prices adding 0.46%.
Higher prices for food and beverages - which increased 1.39% over July -
as well as for communications were the main drivers behind the monthly
acceleration. As a result of the August reading, annual headline
inflation jumped from 3.7% in July to 4.2%. 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. As anticipated,
on 5 September, the Central Bank decided to reduce its benchmark SELIC
target interest rate by 25 basis points to 11.25%. The rate cut
represents the 18th time since September 2005 that monetary
authorities have lowered rates, and, as a result, interest rates have
reached a historic low. The rate cut, however, is the smallest of the
last three meetings, as the Central Bank is concerned that higher
food prices may cause inflation to accelerate. The Bank stated that given
the current macroeconomic circumstances, the additional monetary stimulus
was justified and that it will monitor the evolution of the economic
situation carefully until the next meeting to define the next steps in its
monetary policy. Given rising headline consumer prices against a backdrop
of strong domestic demand and a temporary end of the currency appreciation
amid the protracted global market turbulences, the Central Bank is likely
to slow the pace of interest rate cuts in the coming months. Consensus
Forecast participants expect inflation to moderate and close the year at
3.9%, which is up 0.2 percentage points from last month’s forecast. For
next year, Consensus Forecast participants expect inflation to accelerate
slightly to 4.0%.
Currency climbs to seven-year high
In September, the currency appreciated 7.55% in nominal terms
to 1.84 reais per US$. The figure contrasted the 5.06%
depreciation observed in August, and constitutes the strongest
appreciation observed in a single month since April 2003. As a result of
the strong September reading, the
currency is now 18.2%
stronger than it was in the same month last year. In fact, the real
is trading at its
highest levels since October 2000. The currency strengthened on the back
of speculation that investors would continue purchasing currency as they
invest in local assets.
Even though the Central
Bank lowered nominal interest rates to a historic low, real interest rates
are still among the highest in the world, offering attractive
opportunities for investors.
Consensus Forecast panellists expect
the exchange rate be
1.91 reais to the US$ by the end of 2007, which would represent
a 12.1% appreciation year-on-year over year-end 2006. Next
year, panellists anticipate the exchange rate to appreciate 2.1% nominally
to reach 1.95 reais to the US$ by year-end. |
