Brazil’s August Industrial Production Falls For Third Time in Five Months

Brazil’s industrial production fell in August for the third time in five months, providing more evidence that Latin America’s biggest economy is losing steam as markets sold off around the world on growth concerns.

Output fell 0.2 percent in August, from a revised 0.3 percent growth in July, the national statistics agency said in a report today. Economists expected a 0.1 percent contraction, according to the median estimate of 39 analysts in a Bloomberg survey. Production rose 1.8 percent from a year earlier.

President Dilma Rousseff gave tax cuts to some manufacturers this year and raised levies on imports after a surge in the real made Brazilian exports less competitive. An 18 percent decline in the real against the dollar since the end of July hasn’t yet given relief for these companies as the economy slows in Brazil and abroad, said Ures Folchini, head of fixed income at Banco West LB do Brasil SA.

“The economy is decelerating at the margin,” said Folchini in a telephone interview from Sao Paulo. “The currency drop came so quickly and it takes a while for businessmen to react and reassess whether to buy locally.”

Traders are betting that the central bank will cut borrowing costs three quarters of a percentage point this month, to 11.25 percent, to protect Brazil from financial turmoil that has seen $10 trillion wiped off world stock markets since the end of July. The central bank said last week that “moderate” adjustments in its policy rate will still allow it to hit its 4.5 percent inflation target next year.
Global Slowdown

The slowdown in global demand was the principal reason for the drop in industrial production, especially in the intermediary goods segment, said Flavio Serrano, an economist at Espirito Santo Investment Bank in Sao Paulo.

Production of capital goods, a barometer of investment, rose 0.9 percent in August, while output of consumer products fell 1.3 percent, today’s report said.

“The currency isn’t going to save the domestic industry because of a lack of global impulse,” Serrano said.

The yield on interest rate futures contracts due January 2013, the most traded in Sao Paulo today, rose 17 basis points, or 0.17 percentage points, to 10.31 percent at 9:17 a.m. New York time. The real fell 0.1 percent to 1.8928 per dollar.
Lehman Collapse

Brazil’s central bank sees no need to cut interest rates as aggressively as it did after the collapse of Lehman Brothers Holdings Inc. in September 2008, a government official familiar with monetary policy said. The official, who asked not to be identified because he isn’t authorized to discuss monetary policy, dismissed speculation that policy makers are aiming to bring the benchmark rate to 9 percent next year at the urging of President Dilma Rousseff.

The Purchasing Managers’ Index, a gauge of the strength of the manufacturing sector, fell in September to its lowest level since April 2009. Third-quarter business confidence also slid to its lowest level since 2009.

Last month the government raised a tax by 30 percentage points on cars with foreign-made parts, to protect carmakers from a surge in imports from China. The tax increase followed the government’s announcement of its “Greater Brazil” policy to boost manufacturers hurt by a 43 percent rally in the real since the end of 2008 through August.

Even while production is shrinking, foreign companies continue to expand in Brazil.
Nissan, Renault

Nissan Motor Co. and Renault SA (RNO) plan to build a second factory here and upgrade an existing one to increase its market share, Chief Executive Officer Carlos Ghosn said Oct. 1. after meeting with President Dilma Rousseff. Brazil is the world’s fifth-biggest car market.

As the global economy slows, Brazilian manufacturers have been provided some relief by a weaker real, which has lost 16 percent against the dollar since the end of August, as the risk of sovereign debt crises in Europe led investors to dump emerging market assets.

Industry may also be helped by lower borrowing costs in the months ahead. Central bank President Alexandre Tombini surprised analysts Aug. 31 by slashing the Selic rate by 50 basis points, citing a “substantial deterioration” in the global outlook.

The central bank’s outlook is in line with the views of Rousseff, who told her compatriots last week that Brazil can’t miss the opportunity provided by the global slowdown to cut interest rates.

Brazil’s “ideal” interest rate after inflation is 2 percent to 3 percent, Finance Minister Guido Mantega said yesterday. The inflation-adjusted rate was 4.7 percent in mid- September, the highest in the Group of 20 nations.

The world’s second-largest emerging market after China will grow 3.51 percent this year and 3.7 percent in 2012, according to a central bank survey of economists published yesterday. Last year the economy grew 7.5 percent, its fastest pace in more than two decades.