Brazil Industrial Output Drops for Fourth Straight Month

Brazil’s industrial production in June dropped for the fourth straight month as demand cools at home and in Argentina, a major export market.

Production fell 1.4 percent after revisions showed it contracted 0.8 percent in May, more than originally reported, the national statistics agency said today in Rio de Janeiro. The decline was smaller than the 2.3 percent drop in the median estimate from 38 economists surveyed by Bloomberg. Production fell 6.9 percent from the year before, versus a 7.9 percent decline forecast by analysts.

Data showing the fourth-straight decline in output come two days after leading presidential candidates courted industrial sector executives, whose confidence has hit a record low. Industry is struggling to regain its footing as higher interest rates damp domestic demand, a stronger currency makes exports less competitive, and neighboring Argentina, the largest export destination for Brazilian passenger vehicles, defaults on debt amid a deepening recession.

“We have a recession in the industrial sector, or four consecutive quarters of decline,” Alberto Ramos, chief Latin America economist at Goldman Sachs Group Inc., said by phone from New York. “It’s going to be a difficult year, given headwinds we have from Argentina that are likely to intensify after the default and still very weak domestic demand.”

Swap rates on the contract maturing in January 2017 rose nine basis points, or 0.09 percentage point, to 11.58 percent at 3:26 p.m. local time. The real strengthened 0.2 percent to 2.26 per U.S. dollar.

Auto Production

Brazil’s central bank has held the benchmark Selic rate at 11 percent since April, after raising it from a record-low 7.25 percent in 2013 in order to stifle demand and stem inflation. The economy expanded 0.2 percent in the first quarter, half the pace of the prior three months as family consumption contracted.

Automobile production in Brazil declined 17 percent to 1.57 million units in the first six months of 2014 from a year earlier, as exports dropped 35 percent to 169,457 units, according to car manufacturers’ association Anfavea. Total exports to Argentina fell 20 percent in the same period, according to the Trade Ministry.

The economy of Argentina, which missed an interest payment this week after negotiations with creditors failed, will shrink 0.9 percent in 2014, according to analysts surveyed by Bloomberg. Brazil’s Finance Minister Guido Mantega told reporters yesterday the situation in Argentina currently has no impact on Latin America’s largest economy. Last month Brazil extended tax cuts on cars to stimulate domestic demand.

Argentina Trade

Exports to Argentina fell 22 percent in the first seven months of 2014 from last year as sales of fuel, cars and auto parts to the neighboring country dropped in July, Brazil’s Trade Ministry said in a separate report today. Argentina was Brazil’s third biggest export market through July, it said.

“There’s not much to cling to, at least because the industrial sector is one of the parts of the economy that is most exposed to any problems in Argentina,” Neil Shearing, chief emerging-markets economist at Capital Economics Ltd., said by phone from London. “Argentina is a big market, so that adds to the headwinds for industrial recovery.”

Output of capital goods fell 9.7 percent, the statistics institute said today. Production of consumer durable goods fell 24.9 percent. Of the 24 industries studied by the statistics institute, output in 18 dropped, including a 12.1 percent decline in cars and auto parts.

Industrial Confidence

Today’s better-than-expected headline figure is largely explained by downward revisions to both May and March numbers, according to Goldman’s Ramos. May output fell 0.8 percent, revised from a 0.6 percent decline, and March output dropped 0.7 percent, revised from a 0.5 percent slide.

Industrial confidence has fallen in all but one of seven months this year, and in July reached its lowest level on record, according to the National Industry Confederation, known as CNI. Brazil’s real has gained 3.9 percent in 2014, the second-best performance against the dollar among 16 major currencies tracked by Bloomberg.

Subsidized lending from state development bank BNDES has guaranteed competitive credit, and tax cuts are “fundamental” to competitiveness, President Dilma Rousseff said July 30 at an event hosted by the CNI. Aecio Neves, Rousseff’s closest challenger, said a weaker currency seems “absolutely essential” to ensure competitiveness and boost domestic output.

The June 12 to July 13 World Cup also affected industry as local governments declared public holidays on game days, according to Pedro Tuesta, an economist at 4Cast Ltd. Gerdau SA, Latin America’s largest steelmaker, saw second-quarter net income drop as the monthlong tournament led to declines of steel shipments in its Brazil unit, which represents about a third of the company’s revenue.

Rousseff’s lead over Neves in a possible second round has narrowed. She had 44 percent support to Neves’s 40 percent, according to a July 15-16 Datafolha survey published July 17. The gap of four percentage points falls within the margin of error of plus or minus two percentage points.

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