Brazilian Industries Feel the Pinch as the Economy Contracts

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CEIC Brazil Data Talk - October 2, 2015 Brazil’s industrial sector continued to slide in 2015, as the wider economy deteriorated. The seasonally adjusted Industrial Production Index (IPI) declined by 8.3% year-on-year (YoY) during July 2015, sustaining the declining trend observed since late 2013, on the back of weak manufacturing data. The decline in Brazil’s manufacturing sector was observed across the board, most notably in computer, electronic and optical products, electric machines, devices and materials, and motor vehicle sectors, among others. The mining sector is a notable exception, recording modest 3.7% YoY growth during the same period; mining production has seen a negative correlation with manufacturing since early 2012. As a major growth engine of developing economies, the decline in industrial production reflects bleak prospects in the Brazilian economy at large. The machinery and equipment sub-sector saw the sharpest decline (14% YoY). The decline was largely attributed to uncertainties in the prevailing economic climate and economic prospects, resulting in cutbacks in investments, undermining demand for capital expenditure. The sector also suffers from an unfavourable business environment, particularly with regards to the tax regime favouring machinery imports over domestic machinery. Machinery demand was further curtailed as the cost of credit rose. The increase in subsidised interest rates by Moderfrota – the government’s official agricultural credit scheme – for agricultural machinery purchases, prompted farmers to extend the use of existing machinery in a bid to keep costs down. It also deterred some farmers who were planning to invest in new machineries to scale back production. The machinery sector is not alone in its interest rate sensitivity. The motor vehicle sector saw a 17.0% YoY decline in production during the same period. Rising interest rates on motor vehicle loans effectively “priced out” prospective buyers of vehicles. Average lending rates for household vehicle financing, which were already high, rose to 24.5% as of July 2015, from 22.3% during December 2014, while lending rates for non-financial corporations rose to 21.1% from 19.6% during the same period. The situation was further exacerbated by poor economic activity reducing demand for cargo transport – approximately 50% of cargo movements are sent by road. Weak industrial production is just one of many facets of the Brazilian economy that has seen a decline since mid-2014. The economy contracted during the second quarter of 2015 by 2.6% YoY, continuing its negative growth streak observed since the same quarter of 2014. This was succeeded by an alarming rise in the unemployment rate from its 4.3% trough during December 2014 to 7.5% as of July 2015. Likewise, retail sales contracted by 3.8% YoY during July 2015. Brazil’s present economic woes stand in stark contrast to when the economy rebounded strongly from the 2009 economic downturn. The economy saw growth of between 5.0-9.5% YoY during late 2009 to early 2010, buoyed by strong consumer demand. Critics have argued that the present situation was long foreshadowed by lacklustre growth. This is despite the confluence of positive economic factors, including the commodity boom during the early-2010 to mid-2014, the influx of foreign investments (in part due to the US quantitative easing programmes) and Brazil’s prominence as a major emerging market, among other reasons. Weak domestic prospects have prompted producers to look beyond Brazil as a means of generating profitability. The depreciation of the Brazilian Real (in part due to declining economic fundamentals) to approximately BRL3.76 /USD as of September 2015 from BRL2.64/USD as of December 2014 should bolster Brazil’s export competitiveness. Indeed, some manufacturers are already seeking to increase exports as a means of coping with weak retail numbers. The footwear sector, for one, saw 3.8% YoY and 6.3% YoY increases in exports during June and July 2015 respectively as the seasonally adjusted domestic footwear trade index contracted by 6.3% and 7.8% during the corresponding period. The export-output ratio, which measures the share of industrial production destined for the foreign market, increased from 18.6% in the first quarter of 2015 to 19.2% in the second quarter. However, the weaker Real may affect Brazil’s capital imports (making them more expensive), especially with regards to costly machinery and equipment. Reviving its manufacturing sector may require an overhaul of Brazil’s industrial policy and strategy, especially in the context of raising global competitiveness. However, faced with the rising cost of borrowing – especially following Standard and Poor’s downgrading of Brazilian government debt – and an uncertain economic climate, the sector may find itself short on both financial and political capital to push through drastic reforms. By Bruna Ferreira - CEIC Analyst Discuss this post and many other topics in our LinkedIn Group (you must be a LinkedIn member to participate). Request a Free Trial Subscription. Back to Blog

2nd October 2015 Brazilian Industries Feel the Pinch as the Economy Contracts

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