Brazil Industrial Output Fell By Most Since 2008 in April

Brazil’s industrial production fell in April by the most since 2008 after policy makers raised borrowing costs, surprising analysts who had expected output to expand in Latin America’s biggest economy.

Industrial production fell 2.1 percent from March, a performance worse than all 35 analysts predicted in a Bloomberg survey whose median estimate was for a 0.2 percent increase. Output fell 1.3 percent from a year earlier, the national statistics agency said in Rio de Janeiro.

Thirteen of 27 industries surveyed saw output shrink. Production of machinery fell 5.4 percent in April, reversing four consecutive months of growth, while assembly lines churned out 10.1 percent fewer white goods and appliances. Output of capital goods, a barometer of investment, fell 2.9 percent after expanding 7.7 percent in the first quarter.

“What we didn´t expect was this deceleration in durable consumer goods and investment,” said Roberto Padovani, chief economist at Banco WestLB do Brasil SA, in a telephone interview.

The decline in factory output may help President Dilma Rousseff in her fight against inflation, which has relied on a mix of spending cuts, higher interest rates and measures to curb credit growth. Today she said that an end to a global rally in commodity prices is leading to a strong decline in inflation without jeopardizing economic growth.

Less Pressure

It may also ease pressure on the central bank, which last month said it would raise borrowing costs for a “sufficiently long” time to bring inflation back to the 4.5 percent target in 2012. Consumer prices though mid-May jumped 6.51 percent, above the upper limit of the bank’s target range for the first time since 2005.

“All the items fell across the board,” said Newton Rosa, chief economist for Sul America Investimentos in Sao Paulo, which manages 20 billion reais ($12.6 billion) in assets. “Maybe there won´t be such a necessity for so many rate hikes as the central bank signaled in its minutes.”

Policy makers are expected to push the overnight rate up 50 basis points to 12.50 percent by year-end, according to a central bank survey taken May 27.

The yield on the interest rate futures contract maturing in January 2013 slipped four basis points, or 0.04 percentage point, to 12.49 percent at 9:46 a.m. New York time. The real strengthened 0.8 percent to 1.5820 per U.S. dollar.

April’s decline in production was the biggest since a 12.2 percent contraction in December 2008, following the collapse of Lehman Brothers Holdings Inc. The statistics agency raised to 1.1 percent from 0.5 percent its estimate of output growth in March.

Trade Deficit

While attempting to cool the economy, Rousseff’s administration is also trying to prevent manufacturers from losing competitiveness as a stronger real makes it cheaper to import cars, electronics and other goods.

Brazil will post a trade deficit in manufactured goods of $100 billion this year, up from $71 billion in 2010, the Sao Paulo Industrial Federation estimates. The real has rallied 46 percent since the start of 2009, more than 16 major currencies tracked by Bloomberg except Australia’s dollar. Brazil may expand tax cuts on books to electronic book readers according to a bill approved May 17 by a Senate committee.

The government is also providing incentives for technology firms to establish operations here.

Foxconn Technology Group, which makes Apple Inc.’s iPhone and Dell Inc. computers, is holding talks with the government to expand their manufacturing in Brazil, Rousseff said during her trip to China in April.

Tax Breaks

In addition to Foxconn, Motorola Mobility Holdings Inc., Samsung Electronics Co Ltd, and ZTE Corp are among the companies that can benefit from tax breaks, Communications Minister Paulo Bernardo said May 16.

The fastest economic growth in two decades last year, a 20 percent expansion in credit and near-full employment is prompting carmakers to increase production as demand surges.

Volkswagen AG plans to boost production and add models in Brazil to challenge Fiat SpA for the leading position in the country. Auto sales rose 29 percent to 148,900 in the first half of May, Brazil’s National Federation of Automotive Vehicle Distributors said in Sao Paulo on May 17. For the year, sales are up 5 percent.

“Competition in Brazil is intense and we expect it will become even more intense in the future,” Thomas Schmall, head of VW’s Brazilian operations, said in a March 24 interview.

Auto sales in the country will advance 40 percent by the end of 2016 to 3.6 million vehicles annually, according to industry researcher IHS Automotive.

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