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Industrial production continues upward trend
In January, industrial production increased 8.5% over the
same month last year. The reading was above the 6.3% expansion registered
in December (previously reported: +6.4% year-on-year), but came in below
market expectations, which had predicted 9.0% growth in January. Robust
growth in transport equipment as well as in automobile production output
were the primary drivers behind the strong January reading. The
seasonally adjusted index corroborates the acceleration registered in
January, as industrial production advanced 1.78% over the previous month,
which contrasted the previous month’s 0.82% contraction. As a result of
the strong growth registered in the first month of the year, annual
average industrial output growth continued its upward trajectory,
increasing from 6.0% in December to 6.3%, which represents the fastest
pace since June 2005.
Consensus Forecast
participants expect industry to moderate in the coming months, with full-year
growth reaching 5.2%, which is up 0.1 percentage points from last month’s
projection. Next year, the pace of expansion in industrial output is
likely to decelerate slightly to 4.6%.
Weaker U.S. demand and
stronger currency seen damaging external sector
The external sector is
losing some of its dynamism as a motor for economic growth as a result of
the consistent appreciation of the Brazilian currency and diminished
global demand in the wake of the U.S. slowdown. At the end of February,
the Brazilian real was trading at 1.68 reais to the dollar,
which represented a nominal appreciation of 25.9% versus the US$ year-on-year.
This said, in February, exports still increased a solid 26.4% over the
same month last year to US$ 12.8 billion. However, imports soared 64.8%
to US$ 11.9 billion, reducing the monthly trade surplus to US$ 882 million,
the narrowest trade surplus observed in more than five years. With the
external sector loosing steam, the domestic sector will need to remain
robust in order to keep the economy on track. The steady reduction of
interest rates in the first half of last year helped fuel domestic demand
and propelled the economy at one of the fastest rates in recent years and
should continue to do so, as companies and individuals enjoy record low
interest rates. However, some economic indicators point to a possible
softening of the private consumption in the months ahead. In January,
unemployment broke with its eight-month long declining trend and moved up
from 7.4% in the previous month to 8.0%. Nonetheless, the government
estimates the economy to grow 5.0% this year, which would mark only a
minor deceleration compared to the growth estimate of between 5.2% and
5.3% for 2007 recently announced by Finance Minister Guido Mantega.
Consensus Forecast panelists, however, are not as optimistic
as the government and anticipate the economy to grow 4.6% in this year,
which is unchanged over last month’s figure. Next year, the pace of
economic activity should decelerate slightly with growth reaching 4.2%,
which is also unchanged from last month’s estimate.
Inflation continues to
creep up
In January, consumer
prices rose 0.54% over the previous month, which came in below December’s
0.74% rise and the 0.60% increase expected by the market. Higher prices
for food and beverages as well as for personal products were the main
drivers behind the price rise. As a result of the January reading, annual
headline inflation increased from 5.2% in December to 5.7%. Despite
rising inflationary pressures both at home and abroad, the Central Bank
Monetary Policy Committee (COPOM, Comitê de Política Monetária)
decided unanimously to keep its benchmark Selic target interest rate
unchanged at 11.25% at its monthly meeting on 5 March. As a result, the
Selic rate, which has been cut by a total of 850 basis points since August
2005, remains at a historic low. This year, however, the Central Bank is
expected to raise interest rates in order to bring inflation back to its
year-end target of 4.3%. Consensus Forecast participants share the
opinion of monetary authorities and expect inflation to moderate and close
the year at 4.4%, which is 0.1 percentage points up from last month’s
forecast. For next year, Consensus Forecast participants expect inflation
to moderate to 4.2% |
