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Industrial production weakens in October
In October, industrial production increased 0.8% over the
same month last year. The reading was only a fraction of the 9.6%
expansion registered in September (previously reported: +9.8% year-on-year)
and undershot market expectations, which had industrial output growing
3.6%. In fact, the figure represented the weakest rate of expansion
recorded since December 2006. The slowdown was broad-based, as all but
three of the 27 categories composing the industrial output index slowed
over the previous month. Nonetheless, weaker production in chemical
products as well as in writing and computer equipment was the primary
driver behind the deceleration in the October reading. The seasonally
adjusted index corroborates the weak annual growth observed in October, as
industrial production contracted 1.69% over the previous month, which
contrasted the previous month’s 1.49% expansion. As a result of the
weaker monthly figure annual average growth in industrial production fell
from 6.8% in September to 5.9%, the slowest pace observed in nearly a year.
Consensus
Forecast participants expect industry to moderate in the coming months,
with full-year growth reaching 5.4%, which is down 0.1 percentage points
from last month’s projection. Next year, the pace of expansion in
industrial output is likely to decelerate to 3.3%.
Economy to slow
markedly next year
Full-year growth is
likely to be strong in 2008, buttressed by a robust expansion in the first
half of the year. However, going forward, growth will slow markedly.
Finance Minister Guido Mantega has acknowledged that the turbulence in
international financial markets will affect the Brazilian economy. Such
influences will be felt via reduced external demand for Brazilian exports
and through diminishing availability of international credit to firms.
Although Brazil is one of the least open economies in the region, with
exports making up less than a tenth of total economic output, falling
commodity prices and weaker external demand will curb export growth
considerably. International commodity prices have already experienced a
huge correction in anticipation of slowing demand in the world’s advanced
economies. Accordingly, exports have begun to show signs of slowing,
expanding only 5.0% annually in November, well down from the 17.4% annual
growth observed in October. In part, the slow November reading reflected
the closure of the Itajaí port, as a result of heavy rains. However, part
of the deceleration already showed the effects of falling oil prices and
reduced global demand, especially for minerals and iron. Currently,
Consensus Forecast panellists expect exports to contract 4.0% in 2009,
down from an estimated 25.9% expansion estimated for this year. On the
domestic side of the economy, private consumption, which has constituted
another main engine of economic growth, is likely to moderate in the wake
of deteriorating consumer confidence. In November, the consumer
confidence index fell 4.2 points over the previous month to 96.9 points,
which marked a historic low. The deterioration reflects falling consumer
sentiment regarding both the current situation and that for the next six
months. As a result, the index fell below the 100-point threshold that
separates optimism from pessimism. Business confidence deteriorated more
dramatically. The industrial confidence index plummeted from 105.4 in
October to 82.7 in November, the lowest level observed since July 2003.
Like consumers, businesses are increasingly pessimistic about both their
current situation and the business prospects over the next six months.
The government announced on 1 December, that it may use some of the US$
6.4 billion set aside for the creation of a sovereign wealth fund to
stimulate investment. Currently, the government estimates that the
economy will grow between 5.0% and 5.2% this year, which is only
moderately below the 5.4% growth registered in 2007. Next year, however,
as a result of slowing global growth, the government expects the
economy to expand 3.7% - 3.8%, down from the previous 4.5% estimate.
Consensus Forecast
panellists have kept their outlook for the year unchanged at 5.2%.
However, for next year, the panel is less optimistic than the government
and has revised its forecast down 0.2 percentage points to 2.9%. The
panel is likely to continue to do so as the depth of the current financial
turmoil becomes clearer.
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
unchanged over the previous month’s forecast. For next year, Consensus
Forecast participants expect inflation to moderate to 5.2%. |
