Brazil June Industrial Production Rises More Than Forecast

Brazil’s industrial production increased more than economists forecast in June, as greater output of capital goods helped spur activity in the second-largest emerging market. Swap rates rose.

Output jumped 1.9 percent after dropping a revised 1.8 percent in May, the national statistics agency said today in Rio de Janeiro. The increase was more than predicted by all but one of 36 economists surveyed by Bloomberg, whose median estimate was for a 1.3 percent rise. Production rose 3.1 percent from the year before, up from 1.4 percent in May.

President Dilma Rousseff’s administration has struggled to revive industry, which has contracted in five of the past 12 months, with payroll tax cuts and reduced electricity rates. Brazil’s real this week touched a four-year low against the dollar, which helps exporters and domestic manufacturers that compete with imports. The government will announce today a decision not to renew import tariffs on more than 100 products including steel to help stem inflation, according to an official who asked not to be named because the measure has not yet been made public.

’Impressive Outcome’

“It was a very impressive outcome in June, but it doesn’t show a recovery,” Jankiel Santos, chief economist at Banco Espirito Santo de Investimento, said by telephone from Sao Paulo. “It’s still the see-saw pattern we’ve seen, with June compensating for the decline we’ve seen in the previous month. Nonetheless the widespread nature of the increase in June was good to see.”

Swap rates on the contract maturing in January 2015, the most traded in Sao Paulo today, rose five basis point, or 0.05 percentage point, to 9.64 percent at 10:27 a.m. local time. The real weakened 0.2 percent to 2.2819 per U.S. dollar. The currency has declined 10.1 percent this year.

The June figures were a surprise, particularly in capital goods output, and pushed industrial production in the second quarter to rise 1 percent, up from 0.9 percent in the first quarter, said Andre Perfeito, chief economist at Gradual Investimentos, by telephone from Sao Paulo. Perfeito forecasts 2.1 percent GDP growth in 2013.

Industrial production rose in 22 of the 27 sectors monitored in June. Capital goods output increased 6.3 percent from the previous month and 18 percent year-on-year. Production of automobiles rose 2 percent from May, when it declined 2.2 percent.

Growth Forecast

Economists in the most recent central bank weekly survey held their 2013 growth and inflation forecasts at 2.28 percent and 5.75 percent, respectively. They forecast the real will trade at 2.25 per dollar at year-end, compared with the previous week’s estimate of 2.24.

“The currency is at a good level,” Mauro Borges, president of the Brazilian Agency of Industrial Development, told reporters in Brasilia yesterday. “We think it improves industrial competitiveness very much.”

Brazil’s central bank accelerated the pace of interest rate increases in May in a bid to slow inflation that is hurting economic growth. The bank has increased its benchmark Selic rate by 125 basis points since April. Inflation decelerated to 6.4 percent in the year through mid-July, back within the central bank’s target range of 4.5 percent plus or minus two percentage points.

Not Happy

Should the government lower tariffs to curb inflation pressure, domestic producers of intermediate goods currently shielded by the tariffs will be most affected, said Santos.

“The intermediate goods segment is the heaviest one in the industrial sector, so these guys won’t be happy,” he said.

Production of intermediate goods was unchanged in June, while output of consumer goods rose 3 percent.

“It’s strange that the federal government, especially Finance Minister Guido Mantega, is always changing its mind very fast about the exchange rate,” said Gradual’s Perfeito. “They used all the weapons they could to make real weaker against the dollar. Now it’s weaker and they’re seeming to panic.”

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