Brazil: Inflationary pressures
The expansion that gathered pace during 2007 was sustained in the first half of 2008, although activity appears to be slackening owing to a worsening of financial conditions. Domestic demand has been the main driver of growth. The trade surplus is shrinking, essentially due to buoyant demand for imports, and the current account has shifted into deficit. Dynamism in the labour market continued to deliver robust job creation. Inflation picked up considerably through mid-year.
Further monetary tightening is expected in the near term, despite a falling output gap in 2009, to quell the inflationary pressures arising from a sharp exchange rate depreciation. The primary budget surplus target is expected to be met, although the 2009 draft budget law calls for further increases in expenditure. Reversing the trend of increasing public spending is among Brazil’s main macroeconomic policy challenges.