The government imposed energy rationing programme has caused economic growth to decelerate markedly, particularly in industry, which has been the backbone of the strong economic rebound last year.  The downturn in global demand also threatens to slow export growth.  As a result, the prospects for significantly slower growth this year than originally anticipated have increased.

Central Bank says likely to exceed inflation target for this year.  On 30 August, the Central Bank acknowledged that the 6% upper limit of its inflation target for this year is likely to be exceeded.  The mid-August IBGE-IPCA 15 index released by the National Statistical Institute (IBGE), which covers price increases for the first half of the month over the same period in July, increased 1.18%, up from a 0.94% increase in July.  The consumer price index for the São Paulo metropolitan area elaborated by the São Paulo Fundação Instituto de Pesquisas Econômicas (FIPE), confirmed that inflationary pressures persisted in August, as prices rose 1.15%, down only slightly from the 1.2% monthly change observed in July.  The observed price increases are well above the average monthly increase of 0.6% in the past 12 months.  Despite the recent price spike, the annual inflation rate dropped to 6.4% from 7.0% in July.  Consensus data indicate a high likelihood that price pressures will abate in the coming months.  The Central Bank is confident that next year’s 3.5% inflation target will be met.  Panellists do not share the monetary authorities’ optimism.

Currency depreciation persists but Central Bank abstains from further monetary tightening.  The Central Bank holds the precipitous depreciation of the Real responsible for the increase in inflation this year.  The currency has been plagued by contagion from the Argentina crisis and increased concerns among international investors about the downside effects of energy rationing on economic activity.  In August, the Real lost another 4.7% of its value relative to the US$, following the 5.2% nominal depreciation in July.  The currency remained well over above 2.50 Reais to the US$ threshold throughout most of August and closed at 2.58 on 7 September.  Consensus panellists expect the currency to rebound moderately by the end of the year.  Despite increased prospects for an overshooting of this year’s inflationary target, monetary authorities were not willing to apply the necessary monetary tightening by raising the benchmark SELIC again in the 22 August meeting of the Central Bank board.  Instead authorities maintained the rate at 19.0%, concerned about the deleterious effect that a sixth consecutive hike in interest rates could have on the already ailing economy.  Consensus participants expect the Central Bank to have some leeway towards the end of the year and to lower the SELIC.  Furthermore, lower inflation and a more stable currency is expected to give the Central Bank further room to  bring down interest rates by the end of next year.

Growth comes to virtual standstill in second quarter.  In the second quarter, GDP growth slowed dramatically to just 0.8% over the same quarter last year.  The second quarter reading was the lowest growth rate registered since the third quarter of 1999, when growth reached 0.5%, and was well below the 4.3% growth rate observed in the first quarter this year.  On a seasonally adjusted basis, economic activity dropped by 1.1% over the first quarter.  While service sector growth slowed only moderately from 2.8% in the first quarter to 2.2%, the expansion in both industry and agriculture came to an abrupt halt.  Industrial output, which accounts for 37.2% of GDP, accounted for the lion share of the slowdown, as businesses were faced with both higher interest rates and forced production scale backs needed to comply with the government’s energy rationing programme.  As a result, industrial output slowed to 0.4% in the second quarter, compared to 5.8% in the first quarter.  Within industry, manufacturing experienced the strongest slowdown with year-over-year growth dropping from 6.4% in the first quarter to just 0.4%, while construction activity decelerated from 4.5% in the first quarter to just 0.3% in the second quarter.  Finally, due to low international prices agricultural output slowed from 4.5% in the first quarter to 0.2% in the second quarter.

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