Bloomberg News

Brazil Output Falls by Most Since April as Economy Weakens

November 02, 2011

(Updates with analyst comment in third paragraph.)

Nov. 1 (Bloomberg) -- Brazil’s industrial production fell more than economists expected in September, bolstering the central bank’s argument for more interest-rate cuts in Latin America’s largest economy. Yields on interest rate futures fell.

Output sank 2 percent in September, more than all 38 estimates in a Bloomberg survey of economists whose median estimate was for a 1.2 percent decline. It was the biggest decline since April and the second-most since a 12 percent plunge following the collapse of Lehman Brothers Holdings Inc in 2008. Production shrank 1.6 percent from a year ago, the statistics agency said in Rio de Janeiro.

“This confirms what the government has been saying: that they need to stimulate investment,” said Eduardo Galasini, head of proprietary trading at Banco Banif Primus in Sao Paulo. “The market will see this as another reason to lower rates.”

Europe’s debt crisis and a slowing U.S. economy are compounding the woes of Brazilian manufacturers who are already reeling from the biggest currency rally among major emerging markets since the end of 2008. While the real declined 15 percent in September, companies are being more cautious as Greece tries to avert a default and bank lending is slowing as five interest-rate increases at the start of the year work their way through the $2.1 trillion economy.

Traders in the interest rate futures market increased bets for more interest rate cuts. The yield on contracts maturing in January 2013 fell seven basis points to 10.22 percent at 8:26 a.m. New York time. The real weakened for a second straight day, falling 1.7 percent to 1.7455 per U.S. dollar.

Rate Cuts

In an attempt to protect Brazil from the worst of the crisis, the central bank last month cut interest rates by half a percentage point for a second time, lowering the benchmark Selic rate to 11.5 percent even as inflation touched a six-year high. Economists expect policy makers to lower borrowing costs a further half-point this month, and to 10.50 percent by the end of 2012, according to a central bank survey of about 100 economists published yesterday.

Nomura Securities Inc. said today’s data reinforces its call that the Selic rate will fall to 9.5 percent by the second quarter and raises the possibility of a greater than half-point cut at this month’s monetary policy meeting.

A slowdown in Brazilian factories has helped control inflation expectations. Economists cut their forecast for 2012 consumer prices increases for the second straight week in the central bank survey, to 5.59 percent from 5.60 percent. That government targets inflation of 4.5 percent plus or minus two percentage points.

Capital Goods

Production of capital goods, a barometer of investment, fell 5.5 percent in September, the statistics agency said today. Manufacturing of durable goods led all other categories, declining by 9 percent, shrinking at more than twice the 4.2 percent pace registered in August.

Falling capital goods production bolsters the argument by the government that they need to stimulate investment, while the drop in durable goods shows how less credit growth and rising consumer indebtedness is filtering into the economy, Galasini said.

“It’s another element confirming that the economy is cooling,” said Silvio Campos Neto, an economist at Tendencias Consultoria Integrada in Sao Paulo. “It’s hard to imagine a consistent recovery in the short term.”

Tax Breaks

In the first half of the year, President Dilma Rousseff gave tax breaks to manufacturers and raised levies on imports from China after a surge in the real made Brazilian goods less competitive. The European debt crisis prompted investors to sell emerging market assets, pushing Brazil’s real down as much as 18 percent against the dollar between August and October. Over the past month the real pared its losses, gaining 8 percent.

Braskem SA, Latin America’s largest petrochemicals producer, said a decline in the real would benefit the company because some of its revenue is in dollars, Chief Executive Officer Carlos Fadigas said on Oct. 26

“For the national industry, the higher the dollar gets, the better,” Carlos Fadigas said.

Central bank President Alexandre Tombini said in Sao Paulo yesterday that the world economy is likely to have a prolonged period of slow growth as it recovers from a debt overhang, and that “moderate adjustments” in interest rates are consistent with inflation converging to its 4.5 percent target next year.

--With reporting by Felipe Frisch and Tais Fuoco in Sao Paulo. Editor: Joshua Goodman

To contact the reporter on this story: Alexander Ragir in Rio de Janeiro at aragir@bloomberg.net

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net


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