Brazil’s Growth Expected to Slow Down and Inflation Risks Are Up

    Brazilian exports

    Brazilian exportsBrazilian  Central Bank’s latest weekly market survey, Focus, found that market forecasts for GDP growth this year have fallen from 4.60% to 4.50%.  The forecast for industrial growth in 2011 is 5%.

    The forecast is for public sector debt as a percentage of GDP to rise from 39.09% to 39.20%. The market forecast for the dollar at the end of the year (December 2011) went from 1.73 reais to 1.72 reais.

    The forecast for the country’s trade surplus in 2011 rose from US$ 9.57 billion to US$ 10.03 billion. The forecast for the current account deficit was steady at US$ 67.49 billion.

    The market (the Central Bank surveys one hundred banks and financial institutions) expects foreign direct investments to be US$ 40 billion this year.

    Farm sector exports in Janaury reached a record US$ 5.1 billion, an increase of 26.3% over Janaury 2010, and according to the Ministry of Agriculture, the biggest January since 1989, when records began.

    The agriculture sector also had a US$ 3.9 billion trade surplus last month, an increase of US$ 800 million over January 2010.

    The Ministry of Development, Industry and Foreign Trade reports that total Brazilian exports in January were US$ 15,215 billion. In other words, farm sector exports accounted for 33.8% of all exports in January 2011.

    Leading farm exports were soy, coffee, meats, cereals and ground grains, along with fruit juices and forest products. There has been a sharp rise in the prices of these goods (commodities).

    For example, soy is up 89.3% in price and 67.7% in volume, with January soy exports (oil, grains and ground grain) worth US$ 598.6 million.

    Coffee was up 23.9% in volume and 65.9% in price, with January exports worth US$ 595.4 million. Meats were up 19.7% in price and 9.3% in volume (chicken did  best: up 50.2% in price and 27.8% in volume).

    Cumulative farm exports over the last 12 month ending in January reached US$77.5 billion, a record, an increase of 19.8%, compared to 2010, when exports during the same period were US$ 64.7 billion.

    Higher Inflation and Interest Rates

    The latest Central Bank Quarterly Inflation Report shows that the risk of inflation in Brazil has risen. At the same time, for the twelfth consecutive week, the bank’s weekly market survey, Focus, found that analysts are forecasting a rise in official inflation this year.

    The latest number in the survey, up from 5.66% last week (and 5.42% a month ago), was for inflation as measured by the Broad Consumer Price Index (“IPCA”) to close out 2011 at 5.75% (the government1’s target is 4.5% – plus or minus two percentage points).

    According to the bank’s director of Economic Policy, Carlos Hamiliton Araújo, inflation pressure is coming from both sides. “There is external pressure due to commodity prices and domestic pressure as demand outruns supply. Besides that, we have installed capacity use at record highs and wholesale prices, which rose constantly during 2010, have jumped again since the beginning of the year,” explained Araújo.

    Responding to criticism that the Central Bank was having difficulties recently getting a clear message to financial markets, Araújo admitted the problem. He blamed it on the fact that economic uncertainties make it very hard to get a good grasp of the situation, let alone transmit clear analyses.

    “The basic characteristic of the market recently has been volatility. In such an environment it is very complicated to build reliable models. At each moment, we try to communicate our reading of evolving situations,” he said.

    Brazil’s benchmark interest rate, known as the Selic, is now at 11.25%. The market forecast is for the Selic to rise during the year in response to inflationary pressure and close out 2011 at 12.50%.

    ABr

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