Brazil December Industrial Output Drops Below Every Estimate

Brazil’s industrial production in December fell by the most in five years, surprising analysts, as the central bank continues to boost interest rates in the world’s second-biggest emerging market. Swap rates fell.

Industrial output dropped 3.5 percent from the previous month after declining a revised 0.3 percent in November, the national statistics agency said today in Rio de Janeiro. That was the biggest fall since December 2008, and steeper than predicted by all 37 economists surveyed by Bloomberg, whose median estimate was for a 1.7 percent decline.

President Dilma Rousseff’s government is working to spur economic growth while trying to tame above-target inflation. Today’s report comes after a Chinese manufacturing gauge slipped to a six-month low and Mexican industrial output unexpectedly contracted. Emerging markets globally are struggling to attract capital as the U.S. Federal Reserve tapers its asset purchases, and Brazil’s central bank is raising interest rates, which may impair investment.

“The December result not only exposes weaker industry, but is also giving some signs that investment is not going to have a good start this year,” Padovani said by phone from Sao Paulo.

Swap rates on the contract maturing in January 2015, the most traded in Sao Paulo today, fell 16 basis points, or 0.16 percentage point, to 11.57 percent at 1:48 p.m. local time. The real strengthened 0.9 percent to 2.4181 per U.S. dollar.

Capital Goods

Overall production fell 2.3 percent from the year before, versus a 0.1 percent drop forecast by analysts.

Capital goods output fell 11.6 percent in December, the statistics agency said today. Production of durable consumer goods fell 3 percent, while intermediate goods fell 3.9 percent. Of the 27 industries studied by the national statistics institute, output contracted in 22, including a 17.5 percent drop in vehicles.

“It’s very difficult to find any silver lining,” Pedro Tuesta, an economist at 4Cast Ltd., said by phone from Washington. “There’s nothing. The only thing is that January may have good numbers just because the index is so low.”

Argentina Devaluation

Last month’s 19 percent currency devaluation and other developments in Argentina, Brazil’s third-largest export destination, “add downside risk to an already lackluster outlook for industrial production in 2014,” Alberto Ramos, chief Latin American economist at Goldman Sachs Group Inc., wrote in a note to clients.

Argentina accounted for 8 percent of Brazil’s exports in 2013, of which more than 90 percent are manufactured goods, Ramos said. Argentina is the largest export destination for Brazilian manufactured goods, most of which are vehicles.

Brazil in January posted a trade gap of $4.06 billion, its worst deficit since at least 1991, the Trade Ministry said in a report published yesterday. Imports rose 5.4 percent on a daily average from December, totaling $20 billion, while exports fell 27 percent to $16 billion on a decline in foreign sales of cars and ethanol.

Industry output fell 0.3 percent in the fourth quarter, the statistics agency said today. Economists surveyed by Bloomberg forecast the economy grew 2.3 percent in 2013.

Brazil’s budget gap in 2013 reached 3.28 percent of gross domestic product, the biggest year-end deficit as a percent of GDP since 2009.

Emerging Markets

China’s Purchasing Managers’ Index fell to a six-month low of 50.5, the National Bureau of Statistics and China Federation of Logistics and Purchasing said Feb. 1 in Beijing. Mexico’s industry in November contracted 1.4 percent in November, four times more than analysts forecast and signaling the economy failed to rebound toward the end of last year.

The central bank has raised its benchmark Selic (BZSTSETA) rate by 50 basis points, or 0.5 percentage point, in six straight meetings to 10.5 percent, following a quarter-point increase in April. Inflation twice last year exceeded the upper limit of the 2.5 percent to 6.5 percent target range before ending 2013 at 5.91 percent. The central bank targets 4.5 percent inflation.

Brazil’s currency weakened 13.2 percent last year and year-to-date fallen an additional 2.1 percent, adding pressure to inflation by making imports costlier. That being the case, disappointing economic data complicate the central bank’s decision on whether to slow the pace of rate increases, Tuesta said.

“The central bank is in a big quandary,” he said. “I guess they’re going to dance all the way through Carnival and think about that afterwards.”

To contact the reporter on this story: David Biller in Rio de Janeiro at dbiller1@bloomberg.net

To contact the editor responsible for this story: Andre Soliani at asoliani@bloomberg.net

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