Bloomberg News

Brazil Industry Output Down for Third Month Despite Measures

July 03, 2012

Brazil’s industrial production fell in May for a third straight month, as a weaker currency and government measures to boost sales of cars and other durable goods failed to spur demand.

Output slid 0.9 percent from the month before, compared with a median forecast of a 0.6 percent contraction from 40 economists surveyed by Bloomberg. On an annual basis production was down 4.3 percent, the largest annual decline since a 7.6 percent drop in September 2009, the national statistics agency said today in Rio de Janeiro.

The world’s sixth-largest economy has recovered more slowly than expected from a contraction in the third quarter of 2011, as manufacturers lost ground to foreign competitors and indebted consumers showed signs of crimping demand. The government has reacted with cuts in taxes and interest rates, as well as programs to purchase locally produced goods, while companies such as carmakers General Motors Co. and Daimler AG’s Mercedes- Benz have ordered worker furloughs.

The “disastrous” industry result may jeopardize overall economic growth in Brazil this year and increase bets for steeper interest rate cuts, said Andre Perfeito, chief economist at Gradual Investimentos. “The name of the game is not even growth anymore but not losing ground,” Perfeito said by telephone from Sao Paulo. “The scenario of a Selic at 6 percent at the end of the cycle has gained weight.”

Rate Cuts

Brazil’s central bank has cut its Selic lending rate since August by 400 basis points to a record 8.5 percent. Economists expect the rate to fall to 7.5 percent this year, according to the latest central bank survey.

Brazil’s gross domestic product expanded 2.7 percent in 2011, down from 7.5 percent in 2010. Analysts surveyed by the country’s central bank reduced their 2012 growth forecast for the eighth straight week to 2.05 percent, lower than the central bank’s latest forecast for 2.5 percent.

Output in May fell in 14 of 27 sectors, led by a 4.5 percent drop in vehicle production. Capital goods production, a barometer of investment, declined 1.8 percent.

A 15 percent depreciation of the real between March and May made imported goods more expensive and Brazilian manufacturers more competitive abroad. This was largely offset by weakening global demand, David Beker, Bank of America Merrill Lynch’s chief Brazil economist, said by telephone from Sao Paulo.

Industry Suffering

Brazil’s industry suffered more than other sectors of the economy because a high cost of borrowing last year compounded long-standing problems such as poor infrastructure, rising labor costs and a heavy tax burden, Ilan Goldfajn, chief economist at Itau Unibanco Holding SA, wrote in a column in O Estado de Sao Paulo newspaper today.

Current record-low borrowing costs will help offset high labor costs and eventually benefit Brazilian manufacturers, Daniel Ribeiro Leichsenring, chief economist at Credit Suisse Hedging-Griffo Asset Management SA said by telephone from Sao Paulo. “It’s not going to be a strong recovery, but there’s going to be a recovery.”

Brazil posted a trade surplus of $7.1 billion for the first half of the year, the smallest surplus for that period since 2002, Alessandro Teixeira, executive secretary of the Trade Ministry, told reporters yesterday in Brasilia.

Finance Minister Guido Mantega announced last month that the government would maintain IPI tax breaks on consumer goods such as furniture and appliances, and spend 8.43 billion reais ($4.25 billion) on procurement of vehicles and other equipment through year-end.

The yield on interest rate future contracts maturing in January 2014, the most traded in Sao Paulo today, fell four basis points, or 0.04 percentage point, to 7.80 percent at 11:23 a.m. local time. The real weakened 0.4 percent to 1.9940 per U.S. dollar.

To contact the reporters on this story: David Biller in Boston at dbiller1@bloomberg.net; Raymond Colitt in Brasilia Newsroom at rcolitt@bloomberg.net

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


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