Brazil’s Industrial Production Unexpectedly Stalls in August

Brazil’s industrial production unexpectedly stalled in August, as factories reduced output of consumer goods.

Industrial production was unchanged in August after tumbling a revised 2.4 percent in July, the national statistics agency said today in Rio de Janeiro. That compares with the median 0.2 percent rise estimate from 34 economists surveyed by Bloomberg. Production fell 1.2 percent from a year earlier, a greater drop than the 0.6 percent contraction predicted by economists, and down from a revised 1.7 percent jump in July.

President Dilma Rousseff has sought to reactivate the nation’s manufacturing sector with tax breaks for producers and consumers. Amid flagging government revenue and improved economic growth data, Rousseff has begun rolling back some incentives. Investments in production will face borrowing costs that policy makers boosted this year by more than any major economy to tame inflation. Today’s figures confirm the economy will contract in the third quarter, Carlos Kawall, chief economist at Banco J. Safra SA.

“The number is worse than expected,” Kawall said by phone. “Stability from July is not good news because we had a substantial decline in July. It doesn’t change our view in terms of third quarter growth, which we continue to see as negative.”

Swap rates on the contract maturing in January 2015 fell three basis points, or 0.03 percentage point, to 10.28 percent at 10:31 a.m. local time. The real strengthened 0.1 percent to 2.2144 per U.S. dollar.

Inflation Forecast

Brazil’s economy grew 1.5 percent in the second quarter, surprising all analysts surveyed by Bloomberg, according to data released at end-August. Still, the central bank on Monday reduced its 2013 growth outlook to 2.5 percent from 2.7 percent previously and today’s data partly justify the revision, according to Jankiel Santos, chief economist at Banco Espirito Santo de Investimento SA.

“The contribution from the industrial sector in the third quarter will tend to be very bad,” Santos said by phone.

Economists in the central bank’s most recent weekly survey raised their 2013 inflation forecast to 5.82 percent and held their growth forecast at 2.4 percent. The analysts foresee the exchange rate at 2.3 reais per dollar at year-end.

Benchmark Rate

The central bank has raised its benchmark Selic rate in four straight meetings, to 9 percent, up from a record-low 7.25 percent in April. Inflation decelerated to 5.93 percent in the year through mid-September. While that’s the first time all year it has fallen below 6 percent, it remains closer to the ceiling than the center of the bank’s target range. Policy makers target 4.5 percent plus or minus two percentage points.

Consumer goods output fell 0.6 percent due to a decline in semi-durable and non-durable goods. That could be due in part to companies reducing their stocks, according to Thais Zara, an economist at Rosenberg & Associates Inc. in Sao Paulo.

The positive highlight of today’s data was a 2.6 percent increase in capital goods production, a barometer for investment, which fell in July, according to Banco Safra’s Kawall. That indicates capital goods output may remain stable in the third quarter, he said.

“We moved up in the second quarter and perhaps we stay where we were, which is better than feared when the quarter began,” he said.

Food, Cars

Industrial production rose in 15 of the 27 sectors monitored in August, with the largest increases recorded in foods and automobiles.

Mercedes-Benz, the world’s third largest luxury carmaker, announced yesterday it will spend 170 million euros ($230 million) on a new factory in Brazil. The news followed an announcement by competitor Audi AG last month it will invest 500 million reais in Brazil through 2016. Bayerische Motoren Werke AG also plans to invest 200 million euros in a new plant.

Brazil’s use of manufacturing capacity in July fell to 82.2 percent, its lowest level since September 2012, according to the National Industry Confederation. Industrial confidence in August and September rebounded from a four-year low in July.

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