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Economic
growth accelerating. Key economic releases indicate that
the pace of economic activity continued to accelerate in the first quarter
of this year. According to the National Statistical Institute (IBGE)
seasonally adjusted industrial production grew 9.6% in March over the same
month last year, up from 5.9% in February. Brazilian businesses
continue to expand their investment activity, as capital goods production
increased 24.9% over March 2000. Mechanical, electric and transport
equipment output was up 18.9%, 15.4% and 19.6% respectively.
Consumer and intermediate goods production also grew strongly,
experiencing 8.3% and 7.0% expansions respectively. Within consumer
goods durables experienced the strongest expansion with 26.5%. The
March survey of the National Confederation of Industry (CNI) shows that
industry remains confident about prospects for the second quarter of this
year with 57% of the businesses surveyed anticipating sales to increase
and another 35% expecting sales to remain stable. Furthermore, just
5% of the interviewed firms expect to cut back investment with the balance
expecting further expansion (49%) or to remain at current levels (44%).
The recent interest rate hikes, however, are likely to have a dampening
effect on the current expansion, according to this month’s survey.
In fact, participants expect industrial production growth to remain strong
this year but to moderate from from the 6.5% expansion of last year.
The
Trade Federation of the State of São Paulo (FCESP) reports that
seasonally adjusted retail sales in São Paulo grew 12.0% over the same
month last year.
Preliminary March data indicate that retail sales again experienced
a strong 18.1% expansion over March 2000.
However, the FCESP consumer confidence index, which is a measure on
a scale from zero (highly pessimistic) to 200 (very optimistic), dropped
to 113.4 in April from 115.6 in March and 119.9 in February.
The decline in consumer confidence over the first three months of
the year was due to a worsening of the perception over economic conditions
in light of currency volatility and interest rate hikes.
Nevertheless, consumption is expected to remain healthy this year
according to the Consensus Forecast.
Panellists
remain optimistic about the growth prospects but voice concerns about the
lingering risks posed by Argentina, an uncertain economic outlook in the
United States and, more recently, concerns about the potential impact of
electricity rationing on economic output. In fact, the Consensus GDP
forecast has been lowered this month over last. This month’s
adjustment is the second consecutive downward revision this year but
panellists remain optimistic about growth. Some participants note
that a worsening of the Argentina situation could maintain currency
pressures and force the Central Bank to further tighten monetary policy by
raising interest rates. Rising interest rates and further currency
deterioration, in turn, would negatively impact fiscal balances via debt
servicing costs. The resulting fiscal adjustments that would be
needed to maintain current fiscal targets, when combined with the effect
of monetary tightening on consumption and investment, would serve to
decelerate growth.
Argentina
worries continue to cloud currency. Lingering uncertainty
about Argentina continued to contribute to a further weakening of the Real
last month. In fact, on 25 April, the Real broke the 2.30 to the US$
threshold, a 15.0% depreciation from the end of last year in nominal
terms. Since then, however, the currency has remained weak, closing
at 2.27 Real to the US$ on 11 May. Across the board, panellists have
revised their exchange rate forecast to reflect the recent Real weakening.
Nevertheless, this month’s Consensus Forecast indicates that the
volatility of the first few months of this year is likely to subside in
the coming months with the currency strengthening again by the end of the
year but remaining well above the 1.99 Real to the US$ expected at the
beginning of this year.
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