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Economy
expands at fastest pace in three years
In the
fourth quarter, gross domestic product (GDP) added 6.2% over the same
quarter the year before. The figure was up from the previous quarter’s
5.6% expansion (previously reported: +5.7% year-on-year) and came in above
market expectations, which had seen the economy repeating the previous
quarter’s 5.6% pace. Instead, the economy grew at the fastest pace in
more than three years. Investment continued its string of accelerating
growth and expanded at the fastest pace in more than a decade, adding
16.0% annually (Q2: +14.6% yoy), fuelled by historically low interest
rates. In the same vein, total consumption added 7.0%, which was up from
the third quarter’s 5.3% expansion. On the other hand, the overall
contribution to growth from the external sector was weaker than in the
previous quarter. Exports rebounded from 1.8% growth in the third quarter
to 6.3%. Imports, however, continued to accelerate from 20.4% to 23.4%
in the fourth quarter. At the sector level, a pick-up in services was
partly responsible for the strong fourth quarter reading. Services
expanded 5.3% annually (Q3: +4.6% yoy). The industrial sector, on the
other hand, decelerated, as growth moderated from 5.0% in the third
quarter to 4.4%. A quarter-on-quarter comparison does not fully
corroborate the acceleration suggested by the annual figures. According
to seasonally adjusted data, economic activity grew 1.60% over the
previous quarter, which was down from the 1.80% expansion registered in
the third quarter (previously reported: +1.68% qoq). As a result of the
strong fourth quarter reading, the economy expanded 5.4% for the full-year
2007, which was up from the previous year’s 3.8% growth. Furthermore, the
reading represents the fastest pace since 2004.
External sector weakens
Prospects for economic
growth are deteriorating, as the external sector loses ground as a driver
amid the consistent appreciation of the Brazilian currency and slower
global demand in the wake of a possible U.S. recession. At the end of
March, the Brazilian real was trading at 1.75 reais to the
dollar, which represented a nominal appreciation of 16.8% versus the US$
year-on-year. Meanwhile, n March, exports decreased 2.1% over the
same month last year to US$ 12.6 billion, continuing a trend towards less
dynamic export growth in place since October last year, when exports
peaked at US$ 15.8 billion. In contrast, imports added a strong 21.1% to
reach US$ 11.6 billion and consequently the monthly trade surplus was just
US$ 1.0 billion, which represented a 69.4% contraction over the same month
the year before. However, the domestic side of the economy will likely
pick up some of the slack from lagging international demand. The steady
reduction of interest rates in the first half of last year helped fuel
domestic demand and propelled the economy to one of the fastest growth
rates in recent years. In
February, industrial production increased 9.7% over the same
month last year, powered by strong accelerations in automobile
manufacturing as well as in equipment and machine building, both of which
point to heightened consumer and business spending.
However the outlook
remains unclear, as other economic indicators augur a weakening of private
consumption in the months ahead. In February, unemployment went up for
the second consecutive month, increasing from 8.0% in the previous month
to 8.7%, which is nonetheless below the 9.9% figure registered in the same
month the year before. In addition, this week the government will decide
on whether it will freeze spending in order to curtail shortfalls. The
Central Bank estimates that the economy will grow 4.8% this year, which
would mark a deceleration compared to the 5.4% growth tallied in 2007.
Consensus Forecast panelists, however, are not as optimistic
as the government and anticipate the economy to grow 4.7% in this year,
which is 0.1 percentage points up from last month. Next year, the pace of
economic activity should decelerate with growth reaching 4.2%, which is
unchanged from last month’s estimate.
Central Bank raises
inflation forecast above target
In February, consumer
prices rose 0.49% over the previous month, according to the benchmark
consumer price index (IPCA, Índice Nacional de Preços ao Consumidor
Amplo). The reading came in below January’s 0.54% rise but exceeded
the 0.45% increase expected by the market. The price rise was broad-based
as seven of the nine categories composing the index were up over the
previous month. That said, higher prices for education, related to
seasonally tuition hikes, as well as for food and beverages were the main
drivers behind the price rise. As a result of the February reading,
annual headline inflation was unchanged at 4.6%. Despite rising
inflationary pressures, the Central Bank Monetary Policy Committee (COPOM,
Comitê de Política Monetária) unanimously decided to keep its
benchmark Selic target interest rate unchanged at 11.25% at its most
recent meeting on 5 March. The market, however, does not completely rule
out a hike in the SELIC rate at the Committee’s next meeting scheduled for
15 and 16 April. In its quarterly inflation report from 27 March, the
Central Bank raised its forecast for year-end inflation by 0.3 percentage
points from 4.3% to the current 4.6%. As a result, the current forecast
is now above the Central Bank’s 4.5% target for the year, which increases
the likelihood of a rate hike. Consensus Forecast participants are more
optimistic than monetary authorities and are expecting inflation to
moderate and close the year at 4.5%, which is 0.1 percentage points up
from last month’s forecast. For next year, Consensus Forecast
participants expect inflation to moderate slightly to 4.2% |
