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Cablegate: Brazil's Economy Grows Solidly for Third

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 02 BRASILIA 002221

SIPDIS

SENSITIVE

TREASURY FOR OASIA - DAS LEE AND FPARODI
NSC FOR DEMPSEY
STATE FOR EB/IFD/OMA - MOSS
STATE PASS FED BOARD OF GOVERNORS FOR ROBITAILLE
USDOC FOR 3134/USFCS/OIO/EOLSON/DDEVITO
USDOC FOR 4332/ITA/MAC/WH/OLAC/DMCDOUGALL/ADRISCOLL
USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSON/WBASTIAN

E.O. 12958: N/A
TAGS: ECON EFIN PGOV PREL EINV BR
SUBJECT: BRAZIL'S ECONOMY GROWS SOLIDLY FOR THIRD
CONSECUTIVE QUARTER

REF: A) Brasilia 1275

B) Brasilia 1512
C) Brasilia 463
D) 03 Brasilia 3682

This cable is Sensitive But Unclassified, please protect
accordingly.

1. (SBU) Summary: The Brazilian economy grew another 1.5%
in the second quarter of 2004, marking the third consecutive
quarter of growth at an annual rate of over 6%, according to
official figures released August 31. While still
preliminary, the growth data confirm what all other recent
economic data points have been indicating: the Brazilian
economy is growing healthily. The continued economic
recovery removes a key GoB (and PT party) concern: Lula,
Palocci and Meirelles can confidently assert vindication for
their austere macroeconomic policies. The grass-roots
question ahead of October's municipal elections remains: to
what degree is Brazil's job and personal-income growth is
shifting Brazilian voters' perceptions of their own economic
well-being to Lula's political benefit? Two threats to the
sustainability of the recovery are inflationary pressures
and the continued lack of Congressional action on the GoB
structural reforms. End Summary.

2. (U) GoB end-August figures show that the Brazilian
economy grew 1.5% in the second quarter of 2004, as compared
to the first quarter. Parsing the numbers, on the supply
side Services led growth with a surprising 2.5% increase
over the previous quarter. Agriculture output fell slightly
(-0.3%), while industry grew 0.2%. On the demand side,
Consumption and Investment each grew 1.5%, exports grew a
further 2.2%. Import growth of 1.6% and government
consumption growth of 0.2% round out the picture.

Brazilian GDP
Percent Growth - Seasonally Adjusted


Annual/1 Quarterly Growth/2
2002 2003 3Q03 4Q03 1Q04 2Q04

Total GDP 1.9 -0.2 0.4 1.7 1.7 1.5

Supply Side
- Agriculture 5.5 5.0 -3.0 5.0 3.3 -0.3
- Industry 2.6 -1.0 3.0 1.7 1.5 0.2
- Services 1.6 -0.1 0.1 1.1 0.5 2.5

Demand Side
- Consumption
(Private) -0.4 -3.3 0.7 2.0 0.8 1.5
- Govt. 1.4 0.6 0.0 0.2 0.8 0.2
- Investment -4.2 -6.6 3.1 4.5 2.2 1.5
- Exports 7.9 14.2 0.9 7.5 5.2 2.2
- Imports -12.3 -1.9 0.6 8.5 2.9 1.6

/1 Percent Change on Previous Year
/2 Percent Change on Previous Quarter, Preliminary
Source: Statistics and Geographic Institute (IBGE)

3. (U) Investment spending, which grew 1.5% quarter-on-
quarter, continues to be a significant factor leading this
economic recovery, as it has from the start. The solid
growth in private consumption (1.5%), however, suggests that
recent growth in real incomes is feeding through to
consumption decisions. If sustained, that growth in
consumption bodes well for the sustainability of the
recovery. It also was likely a factor in the surprisingly
strong showing of services (up 2.5%) in the quarter. And
while the quarter-on-quarter growth rate of exports was
down, this merely reflects a modest lessening from the
record levels of the previous quarter. Accumulated growth
in exports in the first half of 2004 was 17.8%.
4. (U) With the strength of current GDP recovery now
beyond dispute, pessimists are proceeding to worry that its
sustainability will be put at risk from emerging
inflationary threats and the continued failure of the
Congress to act on the microeconomic and structural reform
agenda. On the former point, the recently released notes
from the August Monetary Policy Committee (COPOM) meeting
suggest that the Central Bank is now focused on inflationary
threats, exacerbated by high capacity utilization in
industry and high energy prices. While some commentators
point to slow wage growth and still high unemployment as
mitigating inflationary pressures, financial markets,
already resigned to having the Central Bank keep the base
interest rate (SELIC) at 16% for the rest of the year, are
starting to talk if not bet on a SELIC interest-rate
increase before 2005.

5. (U) Meanwhile, the GoB's microeconomic reform agenda
remains stalled in the Congress, which looks unlikely to
push through any major legislation ahead of the October
municipal elections. Planning Minister Mantega last week
publicly branded the Congress's failure to pass the Public-
Private Partnership (PPP) law -- the key GoB measure to
increase investment in infrastructure and measures to de-
bottleneck the economy. For the first time by any top GoB
official, Mantega talked of enacting the legislation through
executive decree. The GoB did recently enact via decree a
series of adjustments to tax rates designed to foster long-
term savings.

Comment
-------

6. (SBU) While enactment of the PPP legislation via decree
would be of dubious constitutionality and is a probable non-
starter, Mantega's utterance may accurately reflect the GoB
concern at loss of legislative momentum on its microeconomic
reform agenda. The GoB sees the much-delayed PPP law in
particular as key to increasing infrastructure investment
and eliminating bottlenecks. One of the key questions going
forward is whether investment levels under present
conditions will lead to sufficient capacity expansion
quickly enough to stave off new inflation. Such longer-term
preoccupations aside, the economic news these days is good
enough that the economy should at least be less of a
negative for the PT and GoB in the October elections. How
much so depends on how quickly and perceptibly the recovery
feeds through to consumers' pocketbooks.

DANILOVICH

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