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Industrial production dips
In March, industrial production increased 1.2% over the same
month last year. The reading was far below the 9.7% expansion registered
in February and also undershot market expectations, which had predicted
2.9% growth in March. According to Brazilian Institute of Geography and
Statistics (Instituto Brasileiro de Geografia e Estadística, IBGE)
the reasons for the slowdown were twofold. First, March had two fewer
working days this year than in 2007. In addition, the petroleum refining
and alcohol production sector experienced an 8.7% year-on-year contraction,
contrasting a 7.0% expansion registered in the previous month. The
seasonally adjusted index, however, does not corroborate the strong
slowdown registered in March, as industrial production increased 0.43%
over the previous month, which contrasted the previous month’s 0.47%
contraction. That said, as a result of the weak annual growth registered
in March, annual average industrial output broke with a year-and-a-half
long acceleration trend, and fell from 6.8% in February to 6.6%.
Consensus Forecast
participants expect industry to decelerate further in the coming months,
with full-year growth reaching 5.4%. Next year, the pace of expansion in
industrial output is likely to decelerate to 4.4%.
S&P raises Brazil’s
rating to investment grade
On 30 April,
international credit agency Standard & Poor’s raised the country’s long-term
foreign currency debt rating from BB+ to BBB-, granting Brazil investment
grade status and placing the country in line with countries such as India
and Romania and closer to higher-rated Chile and Mexico. With this
upgrade, President Lula da Silva also fulfilled one of his goals of having
the country obtain investment grade during his mandate. Standard & Poor’s
cited policy continuity, especially inflation targeting, external and
government debt reduction and strong growth prospects in its decision.
The change to investment grade will likely have a positive effect on the
government and companies’ financing costs, especially if other rating
agencies follow suit and raise their credit ratings for Brazil. Both
Fitch and Moody’s currently rate the country one level below investment
grade at BB+ and Ba1 respectively. Typically, a country is considered to
be investment grade when two of the three major international rating
agencies rate the country as investment grade. The improved debt rating
is likely to buttress economic growth in the medium to long term. That
said, economic growth will soften this year, following on last year’s
strong expansion, as the external sector should lose ground as a growth
driver amid the persistent appreciation of the Brazilian currency and
slower global demand in the wake of a slump in the United States. At the
end of April, the Brazilian real was trading at 1.69 reais
to the dollar, which represented a nominal appreciation of 20.6% versus
the US$ year-on-year. Meanwhile, in April, exports increased 13.0%
over the same month last year to US$ 14.0 billion, continuing the trend
towards less dynamic export growth in place since October last year. In
contrast, imports added a strong 48.9% to reach US$ 12.3 billion.
Consequently the monthly trade surplus decreased from US$ 1.0 billion in
March to US$ 1.7 billion. The domestic side of the economy, however,
will likely pick up some of the slack from lagging global demand,
buttressed by international investment backing following on the country’s
recent rating upgrade. In addition, other economic indicators augur for
continued strong private consumption in the months ahead. In March,
unemployment inched down after two consecutive months of increases,
falling from 8.7% in the previous month to 8.6%, which is well below the
10.1% figure registered in the same month the year before. 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
panellists are slightly less optimistic than monetary authorities and
anticipate the economy to grow 4.7% this year, which is unchanged over
last month’s figure. Next year, the pace of economic activity should
decelerate further, with growth reaching 4.1%, which is 0.1 percentage
points below last month’s estimate.
Central Bank raises
interest rates more than expected amid rising inflation
In April, consumer prices
rose 0.55% over the previous month, according to the benchmark consumer
price index (IPCA, Índice Nacional de Preços ao Consumidor Amplo).
The reading came in above March’s 0.48% rise but was slightly below the
0.59% increase expected by the market. 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 clothing were the main drivers behind the price rise. As a result
of the April reading, annual headline inflation rose from 4.7% in March to
5.0%, which represented the highest level since March 2006. Prompted by
rising inflationary pressures, the Central Bank Monetary Policy Committee
(COPOM, Comitê de Política Monetária) decided unanimously to raise
the benchmark Selic target interest rate 50 basis point from 11.25% to
11.75% on 16 April. The market had expected monetary authorities to raise
interest rates by 25 basis points. The move represented the first time
in three years that the Central Bank raised its benchmark interest rate.
Monetary authorities currently expect inflation to end the year at 4.6%,
0.1 percentage points above the 4.5% year-end target. Consensus Forecast
participants are less optimistic than monetary authorities and are
expecting inflation to moderate and close the year at 4.7%, which is 0.2
percentage points up from last month’s forecast. For next year, Consensus
Forecast participants expect inflation to moderate to 4.3%
Current account deficit soars to near-decade high
In the first quarter, the current account incurred a deficit
of US$ 10.8 billion. The reading contrasted the US$ 241 million surplus
tallied in the same quarter last year and also represented a strong
deterioration compared to the US$ 1.9 billion deficit registered in the
fourth quarter 2007 (previously reported: US$ 2.1 billion deficit).
Furthermore, the figure represented the largest deficit in nearly a decade.
The deterioration over the previous quarter is the result of a smaller
trade surplus and a greater services and income balance deficit. The
trade surplus plummeted from US$ 9.1 billion in the fourth quarter to US$
2.8 billion, which represented the smallest reading in nearly five years.
Exports decelerated from 19.5% annual growth in the previous quarter to
13.8%. Meanwhile, imports continued to grow at virtually the same pace
(Q4 2007: +42.0% year-on-year; Q1 2008: +41.8% yoy). Furthermore, the
services and income balance deficit increased from US$ 12.0 billion to a
historic high of US$ 14.6 billion. As a result of the first quarter
reading, the moving annual current account balance fell from the US$ 1.5
billion surplus registered in the fourth quarter to a US$ 9.5 billion
deficit, the largest annual deficit in more than five years.
Consensus
Forecast panellists anticipate exports to decelerate significantly
this year, while imports will moderate less notably. As a result, the
annual trade balance will drop from US$ 40.0 billion in 2007 to US$ 25.6
billion and the current account surplus deficit will grow to US$ 18.6
billion this year. |
