Strong growth in the course of 2010 removed all slack from the Brazilian economy. Massive infrastructure spending will support strong domestic demand in the coming years. Inflationary pressures are therefore a threat, as labour markets will remain tight and the effects of the significant currency appreciation will dissipate.

Tighter monetary conditions have reined in growth, which is projected to average around 9% in 2011-12. Inflation has continued to veer up, with the price of all demand components combined up by 6¾ per cent in the year to the first quarter of 2011. As excess demand in the economy is gradually eliminated and import prices stop rising, inflation should ease back in 2012. The current account surplus is set to fall to 4½ per cent of GDP (from over 10% in 2007), as result of slower export growth and higher commodity prices.

Following a strong post-crisis rebound driven by a surge in private investment, growth slowed to a more sustainable pace towards the end of 2010. Going forward, growth will pick up somewhat, underpinned by buoyant corporate sentiment and demand for infrastructure spending. Tighter monetary policy and a modest reduction in the deficit will help cool demand somewhat. After moderating towards the end of 2010, inflation has veered up again and remains high. Moreover, inflationary pressures have become more generalised, with non-food prices accelerating.

Economic growth is expected to accelerate above its potential rate in 2011, buttressed by low interest rates, and then to slow marginally in 2012. External demand will remain strong, and investment is projected to gain momentum. Underlying inflationary pressures are building.

Growth has picked up, supported by surging commodity prices, and domestic demand is expected to strengthen in the near term. Output is projected to grow by nearly 5% in 2011 and by 4½ per cent in 2012. As the effect of last year’s food price shock dissipates, disinflation should resume. The budget is projected to return to surplus this year, as revenues will exceed projections by a large margin due to higher-than-expected oil prices, but the non-oil deficit will remain large.

The recovery is expected to gain momentum this year, as strong external conditions and a resumption of employment growth support demand. Notwithstanding upward pressure from food and energy prices, the strong rand and the negative output gap should keep inflation within the Reserve Bank’s target range. Buoyant revenues are projected to shrink the budget deficit.