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Economy
expands faster than expected
In the
third quarter, gross domestic product (GDP) added 5.7% over the same
quarter last year. The figure was virtually unchanged compared to the
previous quarter’s reading of 5.6% (previously reported: +5.4%
year-on-year) but was far above market expectations, which had seen the
economy slowing to 4.9%. Instead, the economy grew at the fastest pace in
three years. Investment expanded at the fastest pace in more than a
decade, adding 14.4% annually (Q2: +13.8% yoy), fuelled by historically
low interest rates. In contrast, consumption was unchanged over the
second quarter’s 5.4% expansion (previously reported: +5.5% yoy). On the
other hand, the overall contribution to growth from the external sector
was weaker than in the previous quarter. Export growth plummeted from
13.3% in the second quarter to a paltry 1.8%. Imports, in contrast,
accelerated from 18.6% to 20.4% in the third quarter. At the sector
level, a strong pick-up in agriculture was responsible for the strong
third quarter reading. Agriculture expanded 9.2% annually (Q2: +1.8% yoy).
In addition, growth in the service sector added a tick, moving up from
4.7% in the second quarter to 4.8%. The industrial sector, on the other
hand, slowed, as growth moderated from 6.9% in the second quarter to
5.0%. A quarter-on-quarter comparison corroborates the acceleration
suggested by the annual figures. According to seasonally adjusted data,
economic activity grew a strong 1.68% over the previous quarter, which was
up from the 1.33% expansion registered in the second quarter.
Unemployment drops to
ten-year low
After expanding at a
robust pace in the third quarter, the economy seems to have continued to
post strong growth in the remaining quarter of 2007. The consistent
reduction of interest rates in the first half of the year fuelled domestic
demand. Furthermore, although monetary authorities have stopped cutting
interest rates for the time being, the full impact of the monetary easing
implemented over the last two years will likely remain an important
positive force in the economy, as consumers and businesses benefit from
lower borrowing costs. More recent economic indicators underscore the
economy’s persistent strength. In November, unemployment continued to
decline, moving down from 8.7% in the previous month to 8.2%, the lowest
level in over ten years. The steady decline in unemployment is propelling
retail sales, which added 9.6% year-on-year in real terms in October.
Meanwhile, on the external side of the economy, the strong Brazilian
real appears to finally be prompting exports to grow at a less dynamic
rhythm. In November, exports increased 18.1% compared to the same month
the year before, which is down strongly from the previous month’s 24.3%
expansion. Exports are bound to have reached US$ 160.9 billion in 2007,
the highest level ever observed. Against this background, the government
estimates the economy to have tallied a minimum growth of 4.5% in 2007 and
expects growth to accelerate to 5.0% this year. Consensus Forecast panellists anticipate the economy
to have grown 5.1% in 2007. This year, however, the pace of economic
activity should decelerate slightly with growth reaching 4.5%, which is
0.1 percentage points up from last month’s estimate.
Inflation finishes the year at Central Bank target
In December, consumer prices rose 0.74% over the previous
month, which came at almost double the 0.38% rise registered in November,
but was in line with market expectations of a 0.75% price increase.
Higher prices for food and beverages as well as for personal products were
the main drivers behind the rise prices. Owing to the December reading,
annual headline inflation increased strongly from 4.2% in November to
4.5%. Nonetheless, the year-end inflation rate was in line with the
Central Bank’s target of 4.5% for 2007. As a result of the benign
inflationary environment, the Central Bank Monetary Policy Committee (COPOM,
Comitê de Política Monetária) the decided to keep its benchmark
Selic target interest rate unchanged at 11.25% at its monthly meeting on 5
December. As a result, the Selic rate, which has been cut by a total of
850 basis points since August 2005, ended 2007 at a historic low. For
this year the Central Bank expects inflation to moderate and finish the
year at 4.3%. Consensus Forecast participants are more optimistic than
monetary authorities and are expecting inflation to moderate and close the
year at 4.2%, which is 0.2 percentage points up from last month’s forecast.
For next year, Consensus Forecast participants expect inflation to
moderate, albeit slightly, to 4.1% |
