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Industrial production recovers strongly in September
In September, industrial production increased 9.8% over the
same month last year. The reading came in well above the 1.9% expansion
registered in August and exceeded market expectations, which had
industrial output growing 8.6%. The expansion was broad-based, as all but
two of the 27 categories composing the industrial output index picking up
the pace over the previous month. Nonetheless, stronger production in
transport equipment as well as in tobacco was the primary driver behind
the acceleration in the September reading. Furthermore, the seasonally
adjusted index corroborates the strong annual growth observed in September,
as industrial production increased 1.68% over the previous month, which
contrasted the previous month’s 1.18% contraction. As a result of the
strong September reading, industrial production grew 6.7% annually in the
third quarter, up from the 6.2% expansion registered in the second quarter.
Furthermore, annual average growth in industrial production increased from
6.4% in August to 6.8%.
Consensus Forecast
participants expect industry to moderate in the coming months, with full-year
growth reaching 5.5%, which is up 0.1 percentage points from last month’s
projection. Next year, the pace of expansion in industrial output is
likely to decelerate slightly to 3.5%.
Global downturn weighs
on economic outlook
Currently, strong
momentum will help to buttress economic growth, but, going forward, the
economy is likely to slow markedly. The effects of the turbulence in
international financial markets on the Brazilian economy will be felt
through less external demand for Brazilian exports. While Brazil is one
of the least open economies in the region, with exports making up less
than 10% of total economic activity, falling commodity prices will curb
export growth considerably. In the past weeks, international commodity
prices have already experienced a huge correction in anticipation of
slowing demand in the world’s advanced economies. In October, the price
of soybeans, one of the country’s major export commodities, fell 22.2%
over the previous month. Accordingly, exports have begun to show signs of
slowing, expanding 17.4% in October, well down from the 41.1% annual
growth observed in September. In response to slowing exports, on 5
November, the Central Bank offered as much as US$ 2.0 billion in
credit lines to exporters. Currently, Consensus Forecast panellists
expect exports to grow 25.8% this year but add only 1.4% in 2009, as the
global downturn takes full effect. On the domestic side of the economy,
private consumption, which has constituted the other main engine of growth,
is likely to moderate in the wake of deteriorating consumer confidence.
In October, the consumer confidence index fell 11.3 points over the
previous month to 101.4 points, which marked lowest reading since July
2006. The deterioration reflects falling consumer sentiment regarding
both consumers’ current situation and that for the next six months. As a
result of the October figure, the index is barely above the 100-point
threshold that separates optimism from pessimism. In addition, business
confidence also worsened. The industrial confidence index dropped from
120.3 in September to 106.1 in October, the lowest level in more than two
years. Businesses are increasingly pessimistic about the business
prospects over the next six months. Although the Brazilian financial
sector is currently not suffering the brunt of the international financial
crisis, on 21 October, President Luiz Inacio Lula da Silva authorised two
state-owned banks, Caixa Econômica Federal and Banco do Brasil,
to purchase shares of distraught financial institutions. The move is
designed to rescue banks whose difficulties may threaten the overall
stability of the financial system. Other measures included providing
banks with incentives of up to 10 billion reais to provide loans to
homebuilders whose projects are in danger of being left incomplete as a
result of the credit crunch. Despite adverse conditions, in its latest
inflation report the Central Bank estimated that the economy would grow
5.0% this year, up from the previously estimated 4.8% and only moderately
below the 5.4% growth registered in 2007. However, against the backdrop
of slowing global growth, the government has slashed its forecast
for next year and expects the economy to expand 3.7% to 3.8%, which is
down from the 4.5% previous estimate.
Consensus Forecast
panellists have left their outlook for the year unchanged at 5.2%.
However, for next year, the panelists have revised their forecast down 0.4
percentage points to 3.1%.
Inflation rises to three
year high
In October, consumer
prices rose 0.45% over the previous month, according to the benchmark
consumer price index (IPCA, Índice Nacional de Preços ao Consumidor
Amplo). The reading came in above the 0.26% rise observed in
September, but was broadly in line with market expectations, which had
prices adding 0.42% month-on-month. The price rise was broad-based as all
nine categories composing the index increased over the previous month.
That said, higher prices for clothing as well as for food and beverages
were the main drivers behind the price rise. As a result of monthly price
increase, annual headline inflation inched up from 6.3% in September to
6.4%, which represented the highest rate observed in more than three years.
At the last monetary policy meeting on 29 October, the Central Bank
Monetary Policy Committee (COPOM, Comitê de Política Monetária)
decided unanimously to keep the benchmark SELIC interest unchanged at a
two-year high of 13.75%. Monetary authorities have raised interest rates
four times this year. Monetary policy makers cited relatively widespread
inflation as well as greater uncertainty in the international markets as
reasons for their decision to keep rates unchanged. Furthermore, policy
makers believe that the slowdown in the domestic economy as a result of
the international credit crunch, will help to curb inflation more rapidly.
The next monetary policy meeting is scheduled for 10 December. The
Central Bank currently expects inflation to end the year at 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 are less optimistic than monetary authorities and are
expecting inflation to moderate and close the year at 6.3%, which is up
0.1 percentage points from last month. For next year, Consensus Forecast
participants expect inflation to moderate to 5.1%.
Current account deficit shrinks slightly in third quarter
In the third quarter, the
current account incurred a deficit of US$ 6.1 billion. The reading
contrasted the US$ 1.2 billion surplus tallied in the same quarter last
year, but represented a slight improvement compared with the US$ 6.9
billion deficit registered in the second quarter (previously reported: US$
6.7 billion deficit). The improvement over the previous quarter was the
result of a smaller deficit in the services balance, which more than
compensated for a slight deterioration in the trade balance. The service
deficit fell from US$ 16.2 billion in the second quarter to US$ 15.4
billion. Meanwhile, the trade surplus decreased from US$ 8.5 billion in
second quarter to US$ 8.3 billion. Exports accelerated from 32.5% annual
growth in the previous quarter to 38.8%. Imports, on the other hand,
decelerated slightly from 58.8% to 57.0%. As a result of the third
quarter reading, the moving annual current account balance deteriorated
from the US$ 17.9 billion deficit registered in the second quarter to US$
25.2 billion, the largest annual deficit in seven years. Consensus
Forecast participants estimate the current account deficit to widen to US$
28.8 billion by the end of the year. Next year, panellists anticipate the
current account deficit to widen even further to US$ 32.7
billion.
Real
continues to depreciate despite Fed swap offer
Despite strengthening towards the end of the month, the
Brazilian real depreciated 9.5% in nominal terms in October to
reach 2.11 reais to the US$, which is the weakest end-of-month
level observed since February 2007. The currency has been falling in
recent months as investors pulled out of the country amid increasing risk
aversion in the wake of the international financial crisis.
However, in October,
the Central Bank sold dollars on the spot market and used international
reserves to stem the slide of the real. Furthermore, on 30 October,
the U.S. Federal Reserve extended US$ 30 billion in swap lines to four
emerging market economies, including Brazil.
Despite the availability of such funds, during the first
seven days of November the currency depreciated a further 2.1% nominally.
Consensus Forecast participants expect the currency to appreciate again by
the end of the year, with the exchange rate reaching 1.98 reais to
the US$. For 2009, panellists anticipate the currency to remain largely
unchanged and finish the year at 1.98 reais to the US$. |
