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Economic
growth remains solid in second quarter
In the
second quarter, gross domestic product (GDP) added 6.1% over the same
quarter the year before. The figure was up from the previous quarter’s
5.9% expansion (previously reported: +5.8% year-on-year) and beat market
expectations of 5.5% growth. Both the domestic and external sectors
remained strong in the second quarter. In the domestic sector, total
consumption added 6.4%, which was unchanged over the first quarter.
Investment expanded 16.2%, which was up a full percentage point from the
15.2% expansion registered in the preceding quarter. In fact, investment
grew at the fastest pace in more than ten years. The external sector
improved slightly over the first quarter. In the second quarter, exports
rebounded and grew 5.1%, after having contracted 2.1% annually in the
previous quarter. Meanwhile, imports also accelerated, but not as
markedly, increasing from an 18.9% annual expansion in the first quarter
to 25.8% growth. At the sector level, accelerations in agriculture and
civil construction were partly responsible for the strong first quarter
reading. The industrial sector, on the other hand, decelerated, as growth
decreased from 7.0% in the first quarter to 5.7%. A quarter-on-quarter
comparison corroborates the strong growth suggested by the annual
figures. According to seasonally adjusted data, economic activity grew
1.58% over the previous quarter, which was nearly double the 0.83%
expansion registered in the first quarter (previously reported: +0.71%
quarter-on-quarter). More recent indicators, however, point to a slowdown
in coming quarters. In August, industrial production added 2.0% yoy, well
below the previous month’s 8.8% expansion.
External sector poised
for slowdown amid global slowdown and weaker commodity prices
The outlook for the
medium term is beginning to dim. Although strong momentum is presently
buttressing economic growth, going forward, the economy is likely to slow
markedly. The effects of the turbulence in international financial
markets on the Brazilian economy will unlikely be strong enough to bring
economic growth to a standstill, but the international crisis will slow
external demand for Brazilian exports. That said, exports make up only
8.3% of GDP, which makes Brazil one of the least open economies in the
region. Moreover, only 15.8% of total exports are directed to the United
States, which is likely to experience the sharpest adjustment in the next
year. The country’s most significant trading partners are in Latin
America, in particular fellow members of the regional trade agreement
Mercosur, which includes Argentina, Paraguay, Uruguay and Venezuela (pending
ratification by parliaments of Brazil and Paraguay). Moreover, Brazil has
intensified its trade relationship with China, which should help to
support export growth in the coming quarters. On the downside, falling
commodity prices will curb export growth. In September, the price of
soybeans, one of the country’s major commodity exports, fell 8.6% over the
previous month. Nonetheless, the price has still increased 8.0% year-to-date.
Currently, exports remain strong (+41.1% year-on-year in September).
However, Consensus Forecast panellists expect exports to grow a more
moderate 24.5% for the full year and add only 8.0% in 2009, as the full
effects of the credit crunch take effect.
Central Bank takes
action to curb effects on economy
Over the past few years,
the Brazilian economy has substantially improved its ability to weather
external shocks by improving its external balances. In the last five
years, the country has registered current account surpluses and has
successively reduced its level of external indebtedness. Moreover, the
country had accumulated US$ 206.5 billion in international reserves by the
end of September, equivalent to 11.9 months of imports. On a negative
note, the government is unlikely to have much manoeuvering room to
buttress the economy with fiscal policy, as it already runs a deficit.
Nevertheless, the government has stated that it would take the necessary
steps to assure liquidity for small banks if these should face
difficulties in the adverse market conditions. In the same vein, the
government has increased the Central Bank’s power to manage the current
crisis. Monetary authorities now have the ability to acquire loans from
banks in need of extra liquidity. Moreover, the Central Bank can demand
that shareholders sell assets and thus inject extra liquidity into
the market. Although Brazilian banks do not hold subprime mortgage backed
assets, tensions in the international market are affecting the sector’s
ability to obtain credit. In response to this situation, the Central Bank
has lowered the reserve requirement ratio three times in the past two
weeks. The government has also lowered taxes on the repatriation of
dollar deposits held by Brazilians abroad. Despite the measures to assure
that the market has access to liquidity, in the first ten days of October,
the Bolsa de Valores de São Paulo (BOVESPA) lost 28.1%, as risk-adverse
investors embarked on a dramatic flight-to-quality and moved their money
to less risky assets. With three quarters of the year behind us, the
current financial market jitters are unlikely to substantially affect the
growth estimate for this year. Buttressed by strong growth in the first
half of the year, the Central Bank currently estimates that the economy
will grow 5.0% this year, up from the previously estimated 4.8% and only
moderately below the 5.4% growth registered in 2007.
Consensus Forecast
panelist have recently revised their outlook for the year up to 5.2%,
which is up 0.4 percentage points from last month’s Consensus. However,
for next year, the have revised their forecast down 0.2 percentage points
to 3.5% and are likely to continue to do so as the depth of the current
financial turmoil becomes clearer.
Inflation rebounds in
September
In September, consumer
prices rose 0.26% over the previous month, according to the benchmark
consumer price index (IPCA, Índice Nacional de Preços ao Consumidor
Amplo). The reading came in broadly in line with the 0.28% rise
observed in August, but slightly overshot market expectations, which had
prices adding 0.20%. The price rise was broad-based as six of the nine
categories composing the index increased over the previous month. That
said, higher prices for housing as well as for personal expenses were the
main drivers behind the price rise. Despite the subdued monthly price
increase, annual headline inflation rose a notch from 6.2% in August to
6.3%. At the last monetary policy meeting on 10 September, the Central
Bank Monetary Policy Committee (COPOM, Comitê de Política Monetária)
raised the benchmark SELIC interest rate by 75 basis points from 13.00% to
13.75%. The move represented the fourth time that the Central Bank raised
the benchmark interest rate this year and was in line with market
expectations. The next monetary policy meeting is scheduled for 28
October. Monetary authorities have also raised their year-end inflation
projection by 0.1 percentage points to the current 6.1%, which is well
above the 4.5% target for 2008 and near the upper ceiling of the ±2.0%
tolerance margin around the central target rate. Consensus Forecast
participants expect inflation to moderate and close the year at 6.2%,
which is 0.3 percentage points below last month’s forecast. For next year,
Consensus Forecast participants expect inflation to moderate to 4.8%.
Brazilian Real
depreciates amid financial market jitters
In September, the
Brazilian real depreciated 14.6% in nominal terms over the previous
month to reach 1.91 reais to the US$, which was the lowest level
observed since August 2007. The move represented the single largest
monthly depreciation since the real fell 22.0% in September 2002.
The currency has been falling in September as investors were pulling out
of the country amid credit concerns in the wake of the increasing
uncertainty caused by the international financial crisis. On 29 September,
the U.S. House of Representatives rejected the government’s US$ 700
billion bailout package for the troubled financial sector, sending the
real even lower in the ensuing market turmoil. The weaker real
also reflects lower global commodity prices, which will force down the
value of the country's exports for products such as soybeans and coffee.
According to the International Coffee Organisation, the price for
Brazilian Natural Arabica fell 9.7% in September over the previous month.
In the first ten days of October the currency depreciated another 16.0%.
Consensus Forecast participants are still taking into account all of the
latest developments but expect the currency to appreciate again, with the
exchange rate reaching 1.74 reais to the US$. For 2009, panellists
anticipate the exchange rate to depreciate to 1.83 reais to the US$
by year-end. |
