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

181905Z Jun 04

UNCLAS SECTION 01 OF 03 BRASILIA 001512 
 
SIPDIS 
 
STATE FOR EB/IFD/OMA - O'REILLY 
NSC FOR DEMPSEY, CRUZ 
TREASURY FOR OASIA - DAS LEE AND SSEGAL 
STATE PLS PASS TO FED BOARD OF GOVERNORS FOR ROBATAILLE 
USDA FOR U/S PENN, FAS/FAA/TERPSTRA 
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 
SOUTHCOM FOR POLAD 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PGOV PREL EINV BR
SUBJECT:  ECONOMIC GROWTH RETURNS; PROBLEMS REMAIN 
 
REFS: A) Brasilia 463   B) Brasilia 1275 
 
This cable is Sensitive But Unclassified, please protect 
accordingly. 
 
¶1.   (SBU) Summary:  Latest official figures show the 
Brazilian economy grew a solid 1.6% in the first quarter of 
2004, the second consecutive quarter of growth at an annual 
rate of over 6%.  This still-preliminary growth data has 
been recently reinforced by, among other positive data 
points, news that industrial production in the first four 
months of 2004 climbed 6.1% above the first four months of 
¶2003.  Pundits have responded with alacrity to these hints 
of the real economy's recovery from Brazil's 2002/2003 
financial storm, with a cover story in newsweekly `Veja' 
proclaiming Finance Minister Palocci now Lula's most popular 
minister and the man who "wins them all."  Ideally, this 
favorable turn of fortunes should give the GoB much-needed 
political room to pursue its broader economic-reform agenda. 
The June 17 Senate defeat of Lula's minimum-wage bill, 
however, illustrates how coalition and perhaps government 
infighting are keeping the GoB on the policy defensive 
against the background of the looming October municipal 
elections.  The prospect of long-term sustained economic 
growth seems little closer.  End summary. 
 
¶2.   (U) GoB end-May figures show the Brazilian economy grew 
1.6% in the first quarter of 2004, as compared to the fourth 
quarter of 2003.  The numbers are consistent with a trend of 
strong growth (over 6% annualized) beginning in the fourth 
quarter of 2003.  Agriculture continued as the leading 
growth sector on the supply side, registering a 3.3% 
increase, while industry grew 1.7% and services rose by a 
much more measured 0.4%.  On the demand side, the continued 
export boom and the third consecutive quarterly increase in 
investment combined to lead growth.  Private consumption, 
while up 0.3%, increased far less than the 1.5% of the 
previous quarter.  Overall growth is the strongest since 
2000, but, unlike then, Brazil in 2004 is racking up record 
exports and a current-account surplus. 
 
 
                        Brazilian GDP 
            Percent Growth - Seasonally Adjusted 
 
 
                 Annual/1       Quarterly Growth/2 
               2002   2003    2Q03   3Q03    4Q03   1Q04 
 
Total GDP      1.9    -0.2    -0.9    0.5     1.5    1.6 
 
Supply Side 
 - Agriculture 5.5     5.0     1.0   -4.6     5.6    3.3 
 - Industry    2.6    -1.0    -3.7    3.0     1.8    1.7 
 - Services    1.6    -0.1    -0.1    0.2     0.8    0.4 
 
Demand Side 
 - Consumption 
   (Private)  -0.4    -3.3    -1.2    0.5     1.5    0.3 
 - Govt.       1.4     0.6     0.3    0.0     0.2    0.8 
 - Investment -4.2    -6.6    -7.1    3.2     4.0    2.3 
 - Exports     7.9    14.2     6.2    0.8     5.7    5.6 
 - Imports   -12.3    -1.9    -1.9    0.7     8.2    4.0 
     /1 Percent Change on Previous Year 
     /2 Percent Change on Previous Quarter 
     Source: Statistics and Geographic Institute (IBGE) 
 
¶3.   (U) A host of other recent data points seem to 
underline the trend of economic recovery.  April retail 
sales were up 9.9% over April 2003.  Industrial production 
was up 6.1% in the first four months of 2004 compared to the 
same period of 2003.  Complete industrial production data 
for May is not yet available, but production of paper 
packaging materials, a barometer for broader industrial 
activity, was up 15.7% in May 2004 over May 2003.  Vehicle 
production rose 7.6% in the same period.  A Getulio Vargas 
Foundation (FGV) survey of manufacturing enterprises found 
capacity utilization in several sectors (textiles, 
detergents, paper, rubber, metals) at 90% or greater; an 
increasing number of business reported investment plans to 
increase capacity.  Consistent with that survey, the value 
of financing requests with BNDES, the national development 
bank, almost tripled in Jan-May 2004 compared to Jan-May 
¶2003. 
 
¶4.   (U) The dark linings behind this silver cloud are the 
weak growth of private consumption in the first quarter, 
plus the slow rate of growth of investment.  Exacerbating 
these factors, the Central Bank's monetary policy committee 
voted June 16 to keep interest rates unchanged at 16%, in 
the wake of recent inflation data and increasing 
inflationary expectations in the market.  There is growing 
belief that interest rates are unlikely to be cut further in 
the near future.  Also, some doubts have been raised about 
the accuracy of the quarterly growth statistics, as they are 
based on a new industrial production index that some 
commentators allege was not fully calibrated before being 
pressed into use. 
 
¶5.   (U) The latest growth data nevertheless has given the 
GOB some welcome relief from the almost constant criticism 
of the recent past.  In particular, Palocci's apparent trip 
from the public-opinion doghouse to the cover of leading 
national weekly news magazine Veja, under the headline 
"Palocci Wins Them All," has been striking.  Suddenly, PT 
leader Genoino is declaring that Palocci will be used as a 
prime asset on the campaign trail to stump for PT party 
candidates in October's municipal elections.  Demands for a 
major overhaul of economic policy, which were becoming ever 
more widespread within Lula's own coalition base, have for 
now faded. 
 
¶6. (SBU) Ideally, these apparent buds of economic recovery 
should create a positive atmosphere for the Lula 
administration to work with the Congress on its broader 
structural and microeconomic reform agenda -- a necessity 
for sustained and strengthened growth.  But in real life, 
the GoB remains as much as ever on the policy defensive, 
hobbled by persistent lack of party discipline, both within 
and without the PT, and by the ramshackle nature of Lula's 
political coalition and the GoB's scandal-diminished 
political stature (ref B).  Most recently, on June 17 Lula's 
bill to increase the minimum wage to no more than Reals 260 
was voted down in the Senate, despite the administration's 
having pulled out all the stops to gain passage (septel). 
And elsewhere on the fiscal front: the Supreme Court may 
soon rule against the constitutionality of taxing 
pensioners, a crucial piece of last year's public-sector 
pension reform. 
 
COMMENT 
------- 
 
¶7. (SBU) With the exception of export growth, there is no 
clear sign yet that the recovery of the last two quarters is 
much more than a still modest, natural bounce-back after the 
extreme recessionary fallout from the 2002 financial crisis. 
Without its continued export and agricultural success, 
Brazil's overall economy would still be struggling by any 
standard.  Spreading and sustaining growth in the longer 
term depends on microeconomic and structural reform measures 
to increase efficiency and bring investment.  The realities 
of coalition politics in this municipal election year, 
however, look set to delay most of this agenda.  Many 
independent analysts look for growth to attenuate as the 
cyclical recovery plays out. 
 
HRINAK