The real decreased 4.8% in October to 2.44 versus the dollar, falling to its weakest level since May 2005 on the back of expectations of lasting above-target inflation following elections in the country. The former governmentís policies of increasing public spending, cutting taxes and subsidizing credit, while notably helping low-income citizens and reducing unemployment, did not prevent the slowdown in economic growth from heading into recession. Furthermore, the widening budget deficit was another source of pressure on the currency. The countryís deficit increased in September to BRL 69.4 billion, the highest figure since December 2001.
The Central Bank of Brazil decided to raise the benchmark interest rate by 25 basis points (bp) to 11.25% in late October. This signals the fourth rate increase in 2014 in the Bankís ongoing attempts to curb inflation. Consumer price inflation accelerated in September to 6.6%, its highest level since July 2013. Inflation has been increasing since the beginning of the year, when it reached 5.3% in January. The unemployment rate in Brazil decreased to 4.9% in September from 5.0% in August. Regionally, the unemployment rate increased in Rio de Janeiro by 0.4% to 3.4% and fell in S?o Paulo to 4.5% from 5.1% in August. In other regions, no changes were reported. A year earlier, unemployment was recorded at 5.4%. Consumer confidence among Brazilians continued to be sluggish in September, though the index posted 102.4 in September up from 100.9 the previous month. The National Statistics Agency reported that the pace of deceleration in retail sales eased in August to register a drop of 0.35% y-o-y, compared with a decline of 1.13% in July. The contraction in retail sales seen in July was the first since October 2003. In a m-o-m comparison, however, retail sales improved by 1.15% in August, up from Julyís 1.05%.
The manufacturing sector showed further signs of deceleration in October, with the manufacturing PMI at 49.1, down from Septemberís 49.3. New orders posted the strongest drop since July 2013 and output contracted for the second month in a row. A Central Bank survey indicated the economy is forecast to grow 1% in 2015. A leading source of upside potential to Brazilís GDP growth in 2015 are the economic policies that the re-elected president announced will be implemented by the end of 2014 to spur foreign investment, tame inflation and control the widening budget deficit. However, if the current growth slowdown is prolonged into 2016, social goals could be impacted as they reply on the countryís foreign exchange reserves and could extend high inflation, which would erode the purchasing power of social benefit programmes. This year is not expected to witness significant change either in economic policy or in the direction of foreign investment in Brazil. The GDP forecast thus remains intact this month at 0.6% for 2014 and 1.2% for 2015.