Brazil - Economic Briefing December 2004

 Economic Growth Accelerates but Tighter Monetary Policy Looms

Economic activity is expanding at a quicker-than-expected pace, as robust domestic demand is complementing the export boom prompted by the strong global economy.  However, rising inflation, resulting from the strong pace of economic expansion, has prompted the Central Bank to tighten monetary policy, which is likely to put the breaks on the current economic rebound.

Economic growth remains strong in third quarter
In the third quarter, gross domestic product (GDP) expanded 6.1% compared to the same quarter last year.  The third quarter reading exceeded Consensus Forecast expectations, which had economic activity picking up at a lesser 4.6% pace and followed on a 5.6% expansion registered in the second quarter.  Seasonally adjusted data confirm the strong third quarter rebound, as activity picked up 1.0% over the prior quarter, down moderately from the 1.4% expansion observed in the second quarter.

Investment and exports bolster activity
Investment activity accelerated, from the 13.4% expansion in the second quarter to 20.1% in the third, despite a less favourable monetary setting.  Exports rose a very strong 18.1% over the third quarter last year, which was up slightly from the already robust 17.6% annual expansion observed in the previous quarter.  Imports registered more moderate but solid growth of 17.7% for the same period (Q2: +14.2% year-on-year). 

Strong consumption growth bolsters domestic demand further
Domestic demand accelerated from the 5.6% growth observed in the second quarter to 7.6% in the third.  In addition to the strong investment push, consumption also contributed to the healthy acceleration in domestic demand, as private consumption grew 5.7% over the same quarter last year (Q2: 4.5% year-on-year).  Public consumption expanded only 0.4%, which was down from the 0.8% pickup observed the previous quarter.

Construction, commerce and manufacturing drive economic rebound
Growth was strongest in construction, commerce and manufacturing.  Construction activity accelerated to 11.6% growth in the third quarter from a 6.9% expansion registered in the prior quarter.  Similarly, commerce also experienced a strong acceleration in activity, as growth rose from 8.9% in the second quarter to 10.4% in the third.  Finally, despite the healthy growth pace of 6.6% in the third quarter, manufacturing activity actually decelerated from 6.9% growth in the second quarter, confirming a trend of moderating growth observed since the first quarter of this year.

Outlook upgraded amid stronger third quarter
Consensus Forecast participants have adjusted their growth estimate for this year upward by 0.2 percentage points from last month, in line with the stronger than expected growth observed in the third quarter.  The economy is now expected to grow 4.7%, which is well ahead of the government’s 3.5% forecast.  The successive monthly hikes by the Central Bank since September have the benchmark SELIC interest rate 125 basis points above its August level.  The tighter monetary setting is likely to curtail the current healthy economic expansion in the coming months.  In fact, Consensus Forecast participants expect growth to slow in the final quarter of the year to 4.3%.  The deceleration is likely to carry over into next year and will lower the GDP expansion in 2005 to 3.5%.