Brazilian July Industry Output Falls More Than All Estimates

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Brazil’s industrial output in July dropped more than forecast by all economists, as the government struggles to revive growth in the face of the highest interest rates in nine years.

Output in July fell 1.5 percent from the previous month after a revised 0.9 percent decline in June, the national statistics agency said in Rio de Janeiro. That was worse than every estimate from 42 economists surveyed by Bloomberg, whose median forecast was for a 0.1 percent decline. Industrial output fell 8.9 percent from the year before, compared with a median estimate of a 6.3 percent decline.

With Latin America’s largest economy entering recession in the second quarter, the central bank must weigh the benefit of tightening monetary policy further to slow above-target inflation against the risk of further damping activity. Higher rates have contributed to depressed confidence and provoked layoffs, propelling the jobless rate to a five-year high.

“This is a very difficult start to the third quarter,” Thais Zara, chief economist at Rosenberg Consultores Associados, said by phone from Sao Paulo. “Probably this will reduce forecasts for GDP and industrial production in the third quarter and the full year, too. It’s one more negative datum with regard to economic activity.”

Weaker Currency

Swap rates maturing in January 2017 rose 11 basis points, or 0.11 percentage point, to 14.54 percent at 9:49 a.m. local time. The real strengthened 0.02 percent to 3.6979 per U.S. dollar. It has weakened 28 percent this year, the most among 16 major currencies tracked by Bloomberg.

Output of capital goods in July, a barometer of investment, fell 1.9 percent, the statistics institute said. Production of consumer goods dropped 1.1 percent. Of the 24 industries studied by the institute, production declined in 14, including a 6.2 percent contraction in food products.

The central bank raised its key rate by 50 basis points in July, and policy makers have signaled that keeping the Selic at its highest level since 2006 for a prolonged period is necessary to slow inflation to the 4.5 percent target by the end of next year.

The bank’s directors will decide Wednesday whether to raise borrowing costs for the eighth straight meeting or keep them on hold. Only five economists of 56 surveyed by Bloomberg forecast the bank will boost the Selic to 14.5 percent. One of the contrarians is Andre Perfeito, chief economist at Sao Paulo-based brokerage Gradual Investimentos, who says today’s data won’t change the central bank’s decision to raise borrowing costs.

Primary Surplus

The government’s inability to post a primary fiscal surplus this year or next and inflation expectations that remain unanchored means “the central bank will make another hike, despite the economic situation getting worse,” Perfeito said by phone. “In spite of that, they’re going to show that they really want to control inflation for 2016.”

Higher rates have already dragged business confidence to its lowest level on record as the economy entered recession in the second quarter, according to the National Industry Confederation. Investment in the three months ended in June foundered, with an 8.1 percent decline.

That has provoked a wave of layoffs, including plans by carmaker General Motors Co. to cut 800 jobs in Brazil, a spokesman said Aug. 25. Brazil’s jobless rate rose to 7.5 percent in July, its highest level since May 2010.