Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Brazil Outlook 2008 “The economy is prepared to withstand the storm.” By Alfredo Coutino, Senior Economist, Latin America Moody’s Economy.com. West Chester, PA, USA. April 24, 2008 The Brazilian economy continues to advance, with no signs of deceleration yet. An unnecessary monetary tightening was prompted by a harmless inflation rebound. The economy will moderate, but will be able to counteract the external shock thanks to strong macroeconomics. The Brazilian economy continues to accelerate, mainly stimulated by a strong domestic market and dynamic exports of commodities. The economic expansion is advancing in an environment of relatively controlled prices. However, a mild inflation rebound has prompted an unnecessary monetary tightening, which might have economic implications ahead. Brazilian financial markets remain among the most attractive to foreign investors. In the foreign exchange market, the wider yield gap is attracting more foreign investors, which, together with the continuous flow of export revenues, keeps the Brazilian real revaluating The economy will be less subject to the negative effects of a U.S. recession than will some countries. Brazil is less exposed to the external shock because of its strong macroeconomic situation and trade diversification. The economy will be able to counteract the impact from abroad thanks to the strength of the domestic market. Economic acceleration continues Brazil's expansion accelerated at the end of last year, with the economy posting its greatest growth in three years. The main propeller was the domestic market, stimulated not only by a more relaxed monetary policy but also by an improvement in employment and controlled inflation. On the demand side, domestic absorption continued to be stimulated by lower interest rates, flexible credit conditions, and stable inflation. Consumption and investment were also stimulated by the expansionary effects of capital inflows. Exports of minerals and primary goods continued to benefit from favorable conditions in the commodity market. On the production side, the recovery was mainly supported by agriculture and services, followed by industry. Thus, during the fourth quarter, GDP growth accelerated to 6.2%, after 5.6% in the third quarter and 5.1% one year earlier. During the whole year, the economy expanded at a rate of 5.4%, compared with 3.8% in 2006. Even during the first two months of this year, Brazilian industry continued to expand at a solid pace. The economy keeps demanding more production inputs, particularly capital and intermediate goods. The production of consumption goods is supported by strong domestic absorption, while investment is being stimulated by the private and public sectors. Favorable credit conditions and lower interest rates are propelling the consumption of durable goods. This way, Brazilian industry continues to respond to the domestic market and also to the still-positive external demand for manufactured goods. In February, industrial production increased 9.7%, after 8.7% in January and only 3.0% one year before. Inflationary panic in the central bank Arguing the need to control a potential deterioration of expectations, the Central Bank of Brazil tightened its monetary policy in April after a timid inflation rebound. Since there is no real inflation problem, and since monetary conditions were already restrictive, the central bank's move seems to be in the wrong direction and designed only to accommodate market pressures. In the past few months, inflation has mildly increased, from 4.5% in December to only 4.7% in March. The inflation rebound is practically insignificant, particularly because inflation is still around the target of 4.5% and far below the upper limit established at 6.5%. This increase, by itself, does not support the central bank’s decision. Yet markets had been clamoring for a hike, fearing continuing, demand-driven inflation. However, there is no excess demand in the economy; on the contrary, there is excess supply. Therefore, monetary policy will have no effect on this insignificant inflation rebound. The monetary move not only introduces doubt and uncertainty, it also indicates that the central bank got caught up in the market’s unjustified panic. If the bank continues to hike rates, tighter monetary conditions could have negative consequences for the currency and external account, and even for economic growth. Outlook Despite the recessionary effects from the U.S., the Brazilian economy will grow solidly this year, although activity will moderate because of the slowdown in global demand. We continue to predict that the economy will advance to a more sustainable growth path in the medium term, mainly supported by the domestic market. The long-run performance will depend on reforms, savings and investments. The economy will grow at a speed consistent with its potential capacity in order to preserve macroeconomic stability. Even though the Southern Cone economy will be affected by the external shock through trade and investment channels, the domestic market will help compensate for the deceleration of external demand. Since Brazilian trade is more diversified and its exports to the U.S. represent only around 2.5% of its GDP, Brazil will likely be less affected than in the past. Also, because the government will strengthen domestic absorption through infrastructure and social spending, the economy will be able not only to mitigate the impact from abroad but also to expand solidly. Since Brazil enjoys a better macroeconomic situation—fiscal and trade surpluses, record-high international reserves, and stable inflation—the economy will be able to weather the recessionary winds from the U.S. This year’s growth will be based mostly on internal sources: private consumption, investment and public spending. Government spending is increasing according to the availability of fiscal revenues and without incurring fiscal imbalances. Public investment in social programs and infrastructure is also supporting the economy’s performance and providing more social relief. Foreign resources will continue to complement domestic investment, particularly in sectors related to energy and other commodities. This will reinforce the economy’s potential capacity in the medium term. We expect GDP growth to moderate to 4.8% this year, after 5.4% last year. Next year, we expect the economy to consolidate its growth path, supported by additional economic reforms. GDP will grow by 5.2% in 2009, driven by domestic sources and complemented by stillpositive conditions in the commodity market. No major inflation problems are expected in the short or medium term, since monetary and fiscal discipline will be maintained. In fact, since the economy will be growing around its potential rate, inflation will stay close to the official target of 4.5% in the medium term. Despite the recent monetary tightening, we expect interest rates to decline later in the year and approach neutral. Particularly this year, the economy will need to work without the monetary brake. External accounts will benefit from commodities to a lesser degree, given the expected moderation of international prices. As a result, the trade surplus will continue to fall, inducing a gradual currency correction and moving the Brazilian real toward a more competitive position. This commentary is produced by Moody's Economy.com, Inc. (MEDC), a subsidiary of Moody's Corporation (MCO) engaged in economic research and analysis. MEDC's commentary is independent and does not reflect the opinions of Moody's Investors Service, Inc., the credit ratings agency which is also a subsidiary of MCO. Moody's Economy.com (MEDC) is a subsidiary of Moody's Corporation, and is headquartered in West Chester, Pennsylvania. MEDC is a leading independent provider of economic, financial, country, and industry research. Copyright © 2008 Moody's Economy.com, Inc. Moody's Economy.com, 121 North Walnut Street, Suite 500, West Chester, PA 19380-3166