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Economic
growth slows
In the
first quarter, gross domestic product (GDP) added 5.8% over the same
quarter the year before. The figure was down from the previous quarter’s
6.2% expansion, but came in line with market expectations. The overall
contribution from the domestic sector weakened in the first quarter.
Total consumption added 6.4%, which was down from the fourth quarter’s
7.0% expansion. Similarly, investment broke with its year-long
acceleration trend and grew 15.2%, which was down, albeit slightly, from
the 16.0% expansion registered in the preceding quarter. The external
sector followed suit and decelerated as export growth slowed more than
imports. In the first quarter, exports contracted 2.1% year-on-year,
contrasting a 6.3% expansion in the previous quarter. Meanwhile, imports
also decelerated but not as markedly, falling from a 23.4% annual
expansion in the fourth quarter to 18.9% growth. At the sector level, a
slowdown in agriculture was partly responsible for the weaker first
quarter reading. The industrial sector, on the other hand, accelerated,
as growth increased from 4.4% in the fourth quarter to 6.6%. A
quarter-on-quarter comparison corroborates the deceleration suggested by
the annual figures. According to seasonally adjusted data, economic
activity grew 0.71% over the previous quarter, which was down from the
1.62% expansion registered in the fourth quarter (previously reported:
+1.60% qoq).
Economic growth outlook
sturdy
After being granted
investment grade by two of the three major international agencies,
prospects for economic growth remain stable. That said, the domestic
sector is likely to compensate for a weaker external stemming from a
consistent appreciation of the Brazilian currency and slower global demand
in the wake of a possible U.S. recession. At the end of June, the
Brazilian real was trading at 1.59 reais to the dollar,
which represented a nominal appreciation of 21.1% versus the US$ year-on-year.
Despite the quick appreciation of the currency, in June, exports
increased 41.7% over the same month last year to reach US$ 18.6 billion,
which was down slightly from the previous month’s record high of US$ 19.3
billion dollars. Meanwhile, imports added a staggering 70.8.% to reach a
historic high of US$ 15.9 billion and, consequently, the monthly trade
surplus was US$ 2.7 billion, which represented a 28.8% contraction over
the same month the year before. However, the domestic side of the economy
will likely pick up some of the slack from a weaker external sector. In
February, industrial production increased 2.4% over the same
month last year, down from the 10.0% growth the previous month. The slow
down was lead by in automobile manufacturing, which, nonetheless expanded
24.2%. Other indicators, however, continue to point to a more robust
domestic sector.
In May, unemployment
decreased for the third consecutive month, falling from 8.5% in the
previous month to 7.9%, which was well below the 10.1% figure registered
in the same month the year before. This year, the Central Bank estimates
that the economy will grow 4.8%.
Consensus Forecast panelists, share monetary authority’s
assessment and see the economy adding 4.8%, which is up 0.1 percentage
points from last month’s Consensus. Next year, the pace of economic
activity should decelerate with growth reaching 3.9%, which is 0.1
percentage points below last month’s estimate.
Central Bank raises
inflation forecast as consumer prices spike unexpectedly in May
In May, consumer prices
rose 0.79% over the previous month, according to the benchmark consumer
price index (IPCA, Índice Nacional de Preços ao Consumidor Amplo).
The reading came in above April’s 0.55% rise and overshot market
expectations, which had prices adding 0.65%. In fact, the May reading
represented the biggest monthly price jump since April 2005. The price
rise was broad-based as eight of the nine categories composing the index
increased over the previous month. That said, higher prices for food and
beverages as well as for personal expenses were the main drivers behind
the price rise. As a result of the May reading, annual headline inflation
soared from 5.0% in April to 5.6%, which represented the highest level
since January 2006. Before the publication of the latest data, on 4 June,
the Central Bank Monetary Policy Committee (COPOM, Comitê de Política
Monetária) had decided to raise the benchmark SELIC interest rate 50
basis points from 11.75% to 12.25%. The move represented the second time
that the Central Bank policy makers raised the benchmark interest rate
this year. The next monetary policy meeting is scheduled for 22 July, at
which time the market does not rule out another interest rate hike.
Despite monetary tightening the government has recently announced plans to
increase the social transfers associated with the bolsa família
program, which may put
additional upward pressure on prices. The bolsa família is a
social transfers program in which payments to more than 11 million
Brazilian families are conditional upon their children being in school and
taking them for regular health appointments. On 25 June, in its
quarterly inflation report, the Central Bank raised its forecast for year-end
inflation to 6.0%, from the 4.6% estimated in March. Prior to ending the
year at 6.0%, the Central Bank sees inflation accelerating further from
the current level, peaking at 6.3% in the third quarter, before slowing
again toward the end of the year. Thus, the projected year-end inflation
is well above the 4.5% target and close to the upper ceiling of the 2.0
percentage point tolerance margin around the central target rate. For
2009, monetary authorities expect inflation to decline to 4.7%, compared
with a previous estimate of 4.4%. Consensus Forecast participants are
slightly more optimistic than monetary authorities and are expecting
inflation to moderate and close the year at 6.0%, which is, nonetheless,
0.8 percentage points up from last month’s forecast. For next year,
Consensus Forecast participants expect inflation to moderate to 4.8% |
