|
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 unchanged from last month’s
projection. Next year, the pace of expansion in industrial output is
likely to decelerate slightly to 4.7%.
Economy remains sturdy
After expanding
robustly in the second quarter, the economy remains poised to post strong
growth in the remainder of the year. During the first half of the year,
the ongoing reduction of interest rates helped to fuel strong growth in
domestic demand. Moreover, although monetary authorities have currently
paused in cutting interest rates, the full impact of the monetary easing
implemented during the last two years has still to develop and economic
indicators for domestic demand in the near future are likely to continue
to point upwards, as consumers and businesses benefit from lower borrowing
costs. As a result of the favourable economic environment, unemployment
continued to decline in October, moving down from 9.0% in the previous
month to 8.7%, the lowest level in almost a year. Due to lower
unemployment, the economy also has experienced a commensurate increase in
retail sales, which added 8.5% year-on-year in real terms in September.
Meanwhile, on the external side of the economy, the strong real
does not seem to be hurting exports, which continue to grow at a strong
pace. In October, exports reached a historical high of US$ 15.7 billion,
which constitutes a 24.3% increase compared to the same month last year.
The Central Bank estimates that the economy will grow 4.7% this year, and
moderate in 2008 to 4.3%.
Consensus Forecast panelists share the Central Bank’s assessment and
anticipate the economy will grow 4.7% in 2007, which is down 0.1
percentage points from last month’s figure. Next year, economic activity
should decelerate slightly, with growth reaching 4.4%, which is unchanged
from last month’s estimate.
Inflation above market expectations
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 4.0%, which is
unchanged from last month’s forecast. For next year, Consensus Forecast
participants expect inflation to maintain the same pace of 4.0% |
