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Industrial production remains robust
In September, industrial production increased 5.6% over the
same month last year. The reading was below the 6.6% expansion registered
the previous month and also fell short of market expectations, which had
industry rising 6.5% annually. A deceleration in furniture production, as
well as slower growth in textile production, partially offset strong
growth in machinery and equipment for industry as well as in other
transport equipment. The seasonally adjusted index corroborates the
deceleration registered in September, as industrial production declined
0.47% over the previous month. Despite the deterioration in the monthly
figure, the annual average growth rate of industrial production rose from
4.5% in September to 4.8%, the fastest pace since September 2005.
Consensus Forecast
participants expect industry to accelerate further in the coming months,
with full-year growth reaching 5.2% which is up 0.2 percentage points from
last month’s projection. Next year, the pace of expansion in industrial
output is likely to decelerate slightly to 4.7%.
Economy is still strong
After expanding at a
multiple year high in the second quarter, the economy remains poised for a
strong second half. During the first half of the year, the ongoing
reduction of interest rates helped to fuel strong growth. Although
presently, monetary authorities have paused in cutting interest rates, the
full impact of the monetary easing implemented during the last two years
has still to unfold and economic indicators in the near future are likely
to point upwards. In September, the unemployment rate reached 9.0%, down
from 9.5% in August and the lowest level in more than two years. As
companies add employees and receive more orders, they use a greater amount
of their installed capacity. In September, the Industry Capacity
Utilization Index, which measures the amount of installed capacity
currently in use, reached 83.1%, just slightly off of the index’s all-time
high of 83.4% tallied in the previous month. Furthermore, given the
strong investment growth observed in the second quarter, industrial
capacity is likely to continue expanding, which bodes well for future
economic growth. Consensus Forecast participants are increasingly optimistic and have
again revised their forecasts upward. Currently, they anticipate the
economy will grow 4.8% in 2007, which is up 0.1 percentage points from
last month’s figure, which represents the eighth consecutive upward
revision. Next year, the pace of economic activity should decelerate
slightly with growth reaching 4.4%.
Central Bank keeps Selic interest rate unchanged, ending two years of rate
cuts
In October, consumer prices rose 0.30% over the previous
month, which came in above the 0.18% increase registered in September.
Furthermore, the reading overshot above market expectations, which had
prices adding 0.20%. Higher prices for clothing as well as for food and
beverages were the main drivers behind the price increase. Owing to the
moderate October reading, annual headline inflation remained unchanged at
September’s 4.1%. At the current level, the inflation rate remains below
the Central Bank’s target of 4.5% and within the Bank’s 2.5% tolerance
margin around the target rate. At its monthly meeting concluded on 17
October, the Central Bank Monetary Policy Committee (COPOM, Comitê de
Política Monetária) decided to keep its benchmark Selic target
interest rate unchanged at 11.25%. The decision was expected by the
majority of analysts but some observers had anticipated the Central Bank
to lower interest rates by 25 basis points, thus continuing a string of 18
consecutive rate cuts, which lowered the Selic rate by a total of 850
basis points since August 2005. Despite nominal interest rates being at a
historical low, they are still among the highest real interest rates in
the world. In addition, real interest rates may increase, if inflation
continues to be moderate, as expected by the market. The Central Bank
expects inflation to finish the year at 4.2%. Consensus Forecast
participants are more optimistic than monetary authorities and are
expecting inflation to moderate and close the year at 3.9%, which is
unchanged from last month’s forecast. For next year, Consensus Forecast
participants expect inflation to accelerate a notch to 4.0%
Current account surplus weakens despite record exports
In the third quarter, the current account incurred a surplus
of US$ 1.0 billion. The reading represents a strong decline compared to
the US$ 2.8 billion surplus registered in the second quarter (previously
reported: US$ 2.6 billion). Furthermore, the third quarter figure is only
a fraction of the US$ 7.5 billion surplus tallied in the same quarter of
the previous year. The deterioration of the current account balance over
the previous quarter is a result of a smaller trade surplus, which
decreased from US$ 11.8 billion in the second quarter to US$ 10.3 billion.
Exports growth slowed markedly over the previous quarter (Q2: +24.1% year-on-year;
Q3: +8.7% yoy), whereas import growth accelerated (Q2: +27.9% yoy; Q3:
31.0% yoy). Despite slower growth, exports reached an all-time high of US$
43.4 billion in the third quarter. In addition, the services and income
account deficit increased from US$ 10.0 billion to US$ 10.3 billion. The
moving annual current account surplus corroborated the weakening
demonstrated in the quarterly results by decreasing from US$ 15.5 billion
in the second quarter to US$ 9.0 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 will drop from US$ 46.4 billion in 2006
to US$ 42.2 billion and the current account surplus will shrink to US$
10.0 billion this year. |
