Global Review : Brazilian Economic Growth Slows Dow - German Sentiment - UK Retail Sales - Eurozone PMI

As expected, the Brazilian economy slowed down somewhat  during the third quarter to post a growth rate of “only” 6.7 percent compared to the year-earlier quarter. This means that the economy has grown by 7.5 percent during the past four quarters and by 8.5 percent year to date. Although the results of the third quarter were weaker than the previous quarters, the 6.7 percent annual rate is still very strong and will help the
Brazilian central bank as it tries to limit the recent acceleration in inflation numbers.

GDP growth for 2009 was revised lower, from down 0.2 percent to down 0.6 percent, fundamentally due to a downward revision in industrial output, which went from a fall of 5.5 percent to a fall of 6.4 percent. Meanwhile, GDP grew by 0.5 percent (not annualized) in the third quarter compared to the previous quarter
and on a seasonally adjusted basis compared to an increase of 1.8 percent during the second quarter.

The biggest culprits for the slowdown in economic activity during the third quarter were a drop of 1.5 percent in agricultural output and a drop of 1.3 percent in industrial output while the service sector increased by 1.0 percent, all on a seasonally adjusted basis.

On the demand side, personal consumption increased by 5.9 percent, government consumption increased by 4.1 percent, gross fixed investment was up by 21.3 percent, exports of goods and services increased by 11.3 percent and imports of goods and services, which are a subtraction to GDP, surged by an impressive
40.9 percent, all compared to the same quarter a year earlier.

The surge in imports of goods and services is probably one of the biggest concerns for the Brazilian government and the central bank. Imports of goods and services have grown by almost 40 percent during the past three quarters and this is the reason why Brazilian government officials have been so adamant in
complaining against countries that either depreciate their currencies or keep their currencies from appreciating.

This increase in imports is putting pressure on the country’s current account and, at some point in time, investors will start doubting the ability of the country to continue to attract enough foreign financing to take care of that deficit.

While the central bank has been implementing some measures to try to prevent a further appreciation of the currency, the currency has continued to strengthen and  prospects are probably for the currency to remain strong for the foreseeable future. Some analysts are indicating that the new administration will need to pare down its planned investments because this will continue to add pressure on the current account deficit and on the currency.

Furthermore, the incoming Rousseff administration will need to rethink its populist rhetoric and come down to earth earlier than anticipated. However, the biggest problem for the Rousseff administration is the recent rise in inflation, which will also limit the new administration’s ability to spend its way to success as the Lula administration was able to do over the past several years.

German Sentiment • Tuesday & Friday 
In November, the ZEW economic sentiment survey suggested an improving outlook for the largest economy in the Eurozone, despite indications of an intensifying sovereign debt crisis at the time. This view was confirmed by the Ifo  business climate survey, which surged to a record high in November.

Since that time, most of the new data out of Germany has remained fairly positive, with GDP growing at a 2.8 percent pace in the third quarter, and stronger-than-expected retail sales for October. Factory orders increased in October as well, and the German PMIs both remain firmly in expansion territory. Will sentiment
deteriorate as a result of the escalation of the sovereign debt situation? We will find out next week when the December reading of the ZEW survey hits the wire on Tuesday, December 14, and the Ifo survey comes out on Friday, December 17.
Previous: 109.3 (Ifo) & 1.8 (ZEW)  
Consensus: 109.0 (Ifo) & 3.9 (ZEW)

U.K. Retail Sales • Thursday 
The U.K. economy expanded at a faster-than-expected pace in the third quarter despite weak growth in consumer spending, which rose only 1 percent at an annualized rate. Retail sales in the United Kingdom increased in October for the first time in three months, suggesting that growth consumer spending remains tepid. The sequential increase was not enough to keep the year-over-year measure out of negative territory as the level of sales slipped 0.1 percent from where it stood in October 2009. There has been some speculation that U.K. consumers might ramp up their spending a bit in November and December, trying to get in purchases ahead of the increase in the value-added tax that goes into effect in January. The November retail sales report is expected on Thursday of next week.

Previous: 0.5% (Month-over-month) 
Consensus: 0.3% 

Eurozone PMIs • Thursday 
The 16-member Eurozone economy expanded at a 1.4 percent pace in the third quarter, marking  the fifth consecutive quarterly expansion. Still, the level of GDP remains roughly 3 percent below the pre-recession peak.

We expect the Eurozone to grow again in the current quarter. Part of our justification stems from the current readings of the various purchasing managers’ surveys, which remain well above the 50 line that separates expansion from contraction.

That said, the Eurozone is not without its share of problems at the moment. The ongoing challenge of the sovereign debt crisis certainly is not a positive for the outlook in Europe. On Thursday, December 16, December readings for the PMIs will tell us whether the fiscal problems in a few member countries will be enough to dampen sentiment across the Eurozone.
Previous: 55.3 (Manufacturing) 55.4 (Services) 
Consensus: 55.2 (Manufacturing) 55.2 (Services)
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