Economic growth continues to proceed along a strong
trajectory driven by a notable improvement in the domestic economy.
Both consumption and investment are experiencing strong growth, which
is moderating only very slowly, as the stronger comparison base of last year
kicks in. However, unless Central Bank intervention and government
measures begin to stem the pronounced currency appreciation observed this
year, the economy is unlikely to be able to fully take advantage of the
current pickup in global demand.
production growth slows in second quarter but on healthy path
In May, industrial production rose 3.5% over the same month last year.
The May reading was slightly below the 3.7% growth rate observed
the prior month and confirmed the gradually diminishing pace observed
since February 2004.
Robust construction material, automotive vehicle and vehicle part
output provided the main push behind the healthy expansion in industrial
activity in May, while oil derivates and special machinery production
experienced the strongest declines.
Consensus Forecast participants expect the current healthy
expansion in industry to accelerate, bolstered by both strong domestic and
As a result, annual growth in output is seen as reaching 4.9%,
which is up 0.2 percentage points from last month’s forecast.
consumption accelerates amid improved sentiment
data suggest that consumption remains robust.
In May, retails sales rose 6.0% in real terms which was well above
the 2.4% increase observed the prior month and points to a strong private
consumption pickup in the second quarter.
A pronounced surge in furniture/household appliances, automobile
and hardware sales, where sales rose in double digits, accounted for the
strong May reading.
The June survey of the National Retailers Federation (Fenalco,
Federación Nacional de Comerciantes) indicates that retail sales
maintained their pace in June, as the percentage of businesses that
experienced improved or the same level of sales rose from 70% in May to
Consensus Forecast participants expect the current expansion in
private consumption to persist with annual growth seen at 4.2% for this
upgraded amid strong domestic demand surge
Consensus Forecast panellists have revised the outlook for this year
upward, anticipating gross domestic product (GDP) to grow 3.9%, which is
up 0.1 percentage point from last month.
The robust growth in domestic demand should serve as the backbone
for ongoing strong growth rates through the end of the year, as exports
may suffer from the strong appreciation in the exchange rate, despite the
stronger expansion in global demand.
The current Consensus Forecast growth estimate is slightly below
the government’s more optimistic 4.0% projection and remains well below
the Central Bank’s upbeat estimate of 4.5%.
Next year, economic activity is anticipated to grow 3.7%.
prices moderate amid food price decline
In July, consumer prices dropped 0.03% over the previous month.
The July reading was well below the strong 0.60% increase observed
the previous month and was also a notch below the 0.03% increase
anticipated by the Consensus Forecast.
The strong decline in food prices (-0.70%) explained the first
monthly decline in consumer prices since July of last year.
The food price drop was only partially offset by rising health
(+0.34%) and housing (+0.27%) costs.
As a result of the July reading, the annual inflation rate rose
only modestly from 6.1% in June to 6.2%.
Forecast participants believe that the current persistence of the
appreciation in the exchange rate is likely to keep a surge in consumer
prices, resulting from the strong pickup
in economic activity, at bay.
Accordingly, inflation is seen declining moderately in the second
half to reach 5.9% by the end of the year, which is in line with the
Central Bank’s inflation target range of 5% to 6% for this year.
Next year, inflation is anticipated to drop further, despite
accelerated currency depreciation and only a modest decline in economic
Consensus Forecast panellists expect annual inflation to moderate
to 5.5%, which is on the upper end of monetary officials’ target range
of 3.5% to 5.5% outlined for 2005.
Bank maintains monetary policy unchanged
The favourable inflation scenario and stable exchange rate has enabled
the Central Bank to keep monetary policy unchanged over the past several
In July, the benchmark DTF interest rate remained virtually
unchanged, dropping from 7.81% to 7.79%.
Nevertheless, monetary officials have indicated that the current
international setting of rising interest rates – particularly in the
United States – could prompt tightening in the near future.
Consensus Forecast participants anticipate the DTF rate to rise to
8.0% by the end of the year.
Next year, the Central Bank is expected to raise the benchmark rate
further to 8.9%.