Brazil Economy – February 2013

Source: OPEC 2/17/2013, Location: South America

The industrial production index was been flat in its latest release. However, durable goods production has increased on a monthly basis in January compared to December 2012. Capital goods, on the other hand, had the worst performance with a 0.8% drop m-o-m. Despite all policy stimulus aimed at boosting investment, capital formation remained a disappointment in 4Q12 with a sharp decline in construction material production.

The confidence survey, however, points to a recovery and the latest PMI showed a significant manufacturing PMI expansion of 53.2 in January, the highest level since March 2011. Despite subdued economic growth last year the unemployment rate broke record lows and ended 2012 at 5.4%, close to its historical low, on a seasonally adjusted basis. It is expected that productivity increase should ease labour market condition slightly in the coming months.

The total public sector primary surplus ended 2012 at R$ 104.1 bn, or 2.4% of GDP. After deducting extraordinary revenue from this amount this is reduced to 1.4% of GDP. With the real interest rate at 5% to 6%, and real GDP growth close to its potential, the primary surplus required to stabilize the net debt ratio is between 1.5% and 2% of GDP. For 2013 it is expected that primary surplus will be around 1% of GDP.

Upward inflation pressures remained in the spotlight in recent weeks in Brazil. The focus of the Banco Central do Brasi (BCB, the Central Bank) now seems to be shifted towards exchange rate policy. The BRL appreciated 2.5%, breaking the psychological level of 2.0 against the US dollar, from a 2.08 average in December. Although government officials did not accept a more pronounced appreciation trend, arguing that a competitive currency was crucial for local manufacturing, it was recognized that an FX rate around 2.0 could gradually ease inflation pressures.

Despite a worsening trade balance that in November registered a $6.3 bn, the central bank’s figures showed that FDI continued to pour into the country. According to these figures, FDI in Brazil in October and November 2012 reached $6.3 bn and $4.6 bn, respectively. The BCB has outlined its outlook for the Brazilian economy in 2013 in its latest inflation report. According to the report, inflation is to fall from 5.7% in 2012 to 4.8% in 2013. Meanwhile, GDP growth is expected to pick up from 1.5% to 3.3% next year. The interest rate is expected to remain at 7.25%.


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