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Brazil July Industrial Production Exceeds Forecast

Brazil July Industrial Production Exceeds Forecast

Posted by Laura Zúñiga on September 02, 2014

Brazil’s industrial production in July rose more than analysts forecast, after the economy slipped into recession in the second quarter.

Production rose 0.7 percent, the first increase since January, the national statistics agency said today in Rio de Janeiro. That compares with the median estimate for a 0.5 percent increase from 36 economists surveyed by Bloomberg. Output fell 3.6 percent from the year before, compared with a 3.7 percent drop forecast by analysts.

President Dilma Rousseff has attempted to revive growth with tax cuts, billions of dollars in credit and higher social spending. With inflation hovering around the upper limit of the target range, consumer and business confidence eroded in the run-up to the first round of presidential elections on Oct. 5. The central bank tomorrow will conclude its two-day monetary policy meeting.

“If it were ever in doubt, this would tip the balance in favor of there being no change tomorrow” in the benchmark Selic rate, Neil Shearing, chief emerging markets economist at Capital Economics Ltd, said by phone from London. “To the extent the Brazilian central bank is going to be easing, I think it will be changes in the reserve requirements.”

Swap rates maturing in January 2017 rose seven basis points, or 0.07 percentage point, to 11.27 percent at 10:11 a.m. local time. The real depreciated 0.2 percent to 2.2503 per U.S. dollar.

Key Rate

Policy makers will keep the key rate at 11 percent for the third consecutive meeting, according to the median estimate of economists surveyed by Bloomberg. The central bank lifted the benchmark Selic by 375 basis points in nine straight meetings through April.

Inflation is only beginning to converge toward the central bank’s 4.5 percent target, so there isn’t room to reduce the Selic in the next year, Jankiel Santos, chief economist at Banco Espirito Santo de Investimento, said by phone from Sao Paulo.

Policy makers on Aug. 20 reduced capital requirements for banks by 15 billion reais ($6.7 billion), a move that could generate as much as 140 billion reais in loans, according to central bank official Caio Ferreira. They also created incentives for banks to channel as much as 10 billion reais from reserves requirements into lending.

Consumer prices decelerated in mid-August to 6.49 percent from 6.51 percent the month prior. Brazil’s inflation target is set at 4.5 percent a year, plus or minus two percentage points.

Capital Goods

Output of capital goods in July rose 16.7 percent, the statistics institute said today. Production of consumer durable goods jumped 20.3 percent. Of the 24 industries studied by the statistics institute, output increased in 20, including 8.5 percent for cars and auto parts.

Brazil’s industrial confidence in July fell to its lowest level on record, as measured by the National Industry Confederation. Industrial production contracted every month from February to June.

“The bounce-back in capital goods doesn’t get close to reversing the fall that we’ve seen -- it needs to be viewed in that context,” Shearing said. “Likewise the rebound in consumer goods, particularly consumer durables, doesn’t reverse even the climate we saw in June. All things being equal this is a good report, but this needs to be viewed in the context of the previous declines.”

‘Bad Sentiment’

In order for industrial production to avoid contracting in the third quarter, it would have to average 0.4 percent expansion in August and September, which would mark the first time growing for three straight months since 2012, when the Selic was lower, according to Santos.

“It’s going to be a little bit harder for industrial production especially given all the uncertainties, bad sentiment, and the climate we’re seeing in the Brazilian market right now, to register a three-month growth streak,” Santos said. Today’s report “tends to be much more a fluctuation during a period of decline rather than a trend reversal.”

Brazil’s economy contracted by 0.6 percent in the second quarter after shrinking a revised 0.2 percent during the first three months of the year, the national statistics agency said on Aug. 29. Investments dropped 5.3 percent on the quarter, while services and industry also shrank.

Former Environment Minister Marina Silva would win 50 percent of voters’ support in an Oct. 26 runoff against Rousseff, who would garner 40 percent, according to a Datafolha poll published on Aug. 29. The survey questioned 2,874 people on Aug. 28-29 and has a margin of error of plus or minus two percentage points.

 

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