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Brazil Industrial Production Rises for Second Month in a Row

Brazil’s industrial production rose for the second consecutive month in July, the first back-to-back increase in more than a year, cementing economist expectations that growth is accelerating as a result of stimulus measures.

Output in July rose 0.3 percent from the previous month, the national statistics agency said today in Rio de Janeiro. Economists had expected output to increase 0.2 percent, according to the median forecast in a Bloomberg survey of 42 analysts. Production fell 2.9 percent from a year ago.

President Dilma Rousseff’s government last week extended for several months tax cuts on cars and appliances, and the central bank reduced borrowing costs to a record low, in a bid to boost flagging growth that was an annualized 1.64 percent in the second quarter. The stimulus led to record car sales in August, and the recovery could soon spread to other industries, said Bank of America Merrill Lynch.

“The auto sector is still helping to explain this recovery process, but as we move forward this should become more widespread,” David Beker, Bank of America’s chief Brazil economist, said by telephone from Sao Paulo.

Record Sales

Brazil car sales rose to a record 400,000 units in August as the tax cuts and lower borrowing costs spurred consumer spending, Fiat SpA, the country’s biggest automaker, said in a statement yesterday. The rebound in car sales comes after inventories accumulated at the start of the year as consumers delayed purchases.

“This package of measures transmitted optimism to the Brazilian consumer, who reacted positively,” Cledorvino Belini, Fiat’s president in Latin America and current head of the Brazilian carmakers association, known as Anfavea, said in the statement.

Turin-based Fiat, citing preliminary figures, said it sold about 100,000 units in August as its production in Brazil reached the highest level in 36 years. Total car sales in August expanded from 364,196 in July and 257,887 in April.

Today’s report showed that manufacturing in Latin America’s biggest economy is poised for a turnaround. Of 27 sectors studied by the statistics agency, 12 registered growth in July, including a 4.9 percent jump in automobile production and a 3 percent increase in the assembly of machinery and equipment.

“Industry will have a better performance in the third quarter after weighing down GDP in the second quarter,” Luciano Rostagno, the chief strategist at Banco WestLB do Brasil SA, said by telephone from Sao Paulo. “The data is in line with the government’s contention that stimulus measures should have an effect and the economy will gradually gain strength over the second half of the year.”

Durable Goods

Consumption of durable goods rose 0.8 percent in July, while consumption of semi- or non-durable goods dropped 0.6 percent. The latter compared with an increase of 1.6 percent in June.

“Durable goods depend more on credit, and they are doing OK,” Beker said. “Non-durable goods depend more on income, and they were doing O.K., so for me it was a slight surprise that we are seeing a decline in this group.”

Swap rates on the contract maturing in January 2014, the most traded in Sao Paulo today, rose 2 basis points to 7.77 percent at 9:59 a.m. local time. The real, which has declined 8.1 percent this year against the greenback, fell 0.1 percent to 2.0306 per U.S. dollar.

In addition to spurring demand, the government has tried to shield manufacturers from cheaper imports by weakening the real, which has declined this year more than any major currency tracked by Bloomberg. It’s also been raising import levies on foreign-made vehicles, making it harder to tap into rising demand for cars by the country’s expanding middle class.

That’s spurred investment by Asian automakers including Hyundai Motor Co., which is opening this month its first South American assembly line outside Sao Paulo.

Economic Growth

Brazil’s gross domestic product expanded 0.4 percent in the second quarter, the statistics agency reported last week. While that’s the fastest pace in a year, economists say there’s little evidence that the world’s biggest emerging market after China is recovering strongly. Growth in Brazil this year trails that of Russia, India and China, its peers among the BRIC group of the world’s biggest emerging markets.

Economists reduced their forecast for growth this year for the fifth straight week, to 1.64 percent, in the last survey taken by the central bank on Aug. 31.

Even as growth remains weak, the inflation outlook is worsening as a result of bad weather that destroyed crops in the U.S. and Brazil and strong demand being spurred on by low unemployment and the government stimulus.

Analysts raised their forecast for year-end inflation for the eighth straight week in the latest central bank survey, to 5.2 percent. Price pressures are limiting the space policy makers have to lower borrowing costs after they reduced the benchmark Selic rate last week to 7.50 percent.

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