activity gains speed
domestic product (GDP) expanded 5.7% in the second quarter of this year
over the same quarter in 2003. The second quarter reading was well
ahead of market expectations and was more than double the 2.7% pace
observed in the first quarter. A quarter-on-quarter comparison does
not bear out the strong expansion of the economy, as seasonally-adjusted
economic growth reached 1.49% over the prior quarter, which was down from
the robust 1.74% expansion observed in the first quarter.
domestic demand drives growth engine
The acceleration over the first quarter was entirely due to the domestic
side of the economy. The contribution from the external sector, in
contrast, dropped in the second quarter. Domestic demand growth more
than tripled from 1.5% observed in the first quarter to 5.5% in the second
quarter over the same quarter last year, as both, consumption and
investment, rebounded strongly from anaemic growth in the first quarter.
Consumption expanded a robust 4.1% in the second quarter, following on
1.3% growth in the first and investment more than quintupled the 2.2% pace
observed in the first quarter to 11.6% in the second. The
contribution to economic growth from the external sector dropped compared
to the first quarter, as exports grew at a slower pace whereas imports,
which are a subtraction in the calculation of GDP, accelerated. Export
growth remained strong with 16.5% over the same quarter last year but
growth was down moderately from the 19.3% expansion in the previous
quarter. Imports, on the other hand, grew at 14.1%, which was up
from the 11.7% pace observed in the first quarter.
and manufacturing propel economic activity and construction exits
With the exception of declines in mining and communications activity, all
sectors experienced strong growth. Commerce and manufacturing
provided the strongest push behind the robust second quarter economic
performance, as activity rose by 9.9% and 8.5% respectively over the same
quarter last year. Agriculture and transportation were the only
sectors to experience a moderate slowdown, while the construction sector
exhibited a growth acceleration of 8.9 percentage points. As a
result, the sector finally exited five consecutive quarters of declines
and grew at a strong 6.7% pace over the same quarter last year.
favourable but looming interest rate hike could slow growth pace
Consensus Forecast participants expect the pace of economic activity to
slow moderately in the second half of the year, with GDP growth
decelerating to 3.9% in the third and 3.6% in the fourth quarter.
Nevertheless, for the full year, Consensus Forecast panellists revised
their growth estimates upward by 0.4 percentage points from last month’s
forecast with GDP expected to expand 4.1%. The Consensus Forecast
figure is now above the government’s 3.8% forecast, which was revised
upward on 31 August from the previous 3.5% estimate. Next year,
growth is anticipated to decelerate only moderately, as economic activity
is seen as rising 3.5%, which is unchanged from last month’s forecast
and below the government’s 4.0% projection.
rising as economic activity and energy prices exert pressure
In August, consumer prices rose 0.69%, which was slightly above market
expectations of 0.60% in the LatinFocus Consensus Forecast but represented
moderation when compared with the prior month’s figure of 0.91%.
Higher fuel, energy, telephone and food prices were the key factors behind
the August increase. As a result of the August price increase, the
annual inflation rate rose to 7.2% from 6.8% in July. The annual
variation in consumer prices remains well above the 5.5% central inflation
target set by the Central Bank for this year but remains within its
tolerance interval of +/-2.5%. Consensus Forecast participants
expect annual inflation to remain above the Central Bank’s inflation
target at 7.2%, which is 0.2 percentage points above last month’s
forecast. Monetary authorities are confident that inflation will be
reduced to 4.5% next year (with a +/-2.5% tolerance margin) and expect the
same target and tolerance interval will be sustained for 2006.
Nevertheless, Consensus Forecast participants are not as optimistic about
Central Bank monetary discipline and see annual inflation reaching 5.7% by
the end of 2005 - still within the tolerance interval.
Bank maintains monetary policy unchanged amid economic pickup
In its monetary policy meeting on 18 August, the Central Bank’s monetary
policy committee (COMPOM) decided to keep the benchmark SELIC interest
rate at its previous month level of 16.0%. Officials cited concerns
about likely inflationary pressures from the acceleration in economic
activity and higher oil prices as key factors behind the decision to
maintain monetary policy unchanged. Nevertheless, Consensus Forecast
participants remain optimistic that the Central Bank will be able to cut
interest rates further this year, as the SELIC rate is expected to drop to
15.4%. However, participants appear to be anticipating a tighter
monetary policy setting for this year than expected earlier. This
month’s 0._5 percentage point upward revision was the fourth consecutive
upward revision. Next year, interest rates should come down further,
as inflationary pressures abate amid more moderate currency depreciation
and slowing economic growth.