Brazil: Double Blows Stagger the Industrial Sector

An energy crisis may chill Brazil's economic growth at the same time that a weaker currency is making rising inflation more of a problem.

South America's largest nation is grappling with the prospect of energy rationing and rolling blackouts. Brazil's electric grid depends on hydropower, but a long drought in the southeast region has caused a drop in energy production. In addition, Brazil has not added enough power-generating plants to keep up with the rise in energy demand.

On May 18, the government announced a rationing plan to start on June 1. Industry is expected to cut power use by at least 15%, but such a drop will curtail factory activity at a time when the economy is already slowing. Real gross domestic product in the first quarter grew 3.77% from a year ago, down from a 4.46% gain in the fourth quarter. The industrial sector has fueled almost all of the rise in real GDP. The output of capital goods has been particularly strong (chart).

Now, industry will be hampered by energy problems as well as by higher interest rates. The central bank has tightened significantly this year in a bid to stop the rise in inflation. A key measure shows that consumer prices were up 0.58% in April, on top of a 0.38% advance in March. In just the first four months of this year, prices are up 2% with the central bank's inflation target for all of 2001 between 2% and 6%.

Inflation is also up because a weak real is lifting import prices. The Brazilian currency has been sinking this year because of neighboring Argentina's financial woes and a scandal in Brazil's Congress. The real fell further when Argentina had to accept a higher interest rate when it sold some Treasury bills in late May. In addition, the scandal may well continue for weeks and delay action on Brazil's pressing economic and energy problems.

For now, Brazil's real GDP is expected to grow by about 3% in 2001. But the energy crisis, as well as higher interest rates, threaten to slow growth even further.

By James C. Cooper & Kathleen Madigan

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