Brazil's weak economic outlook

Part 3
Brazil's weak economic outlook (Part 3 of 5)

Why industrial production in Brazil points to stagnation

Brazil’s industrial production

The August report showed industrial production was flat versus July. On a year-over-year metric, production actually contracted 1.2%. The market consensus was a 0.2% monthly gain and no more than a 0.6% yearly drop. The monthly average is now at a mere 0.1%.

Brazilian Industrial Production 2013-10-04Enlarge Graph

The key drivers of the drop were weaker consumer and intermediate good sectors.

  • The consumer goods sector contracted 0.6% in August and fell 2.8% on a yearly basis.
  • Intermediate goods contracted 0.6% as well in August, though they’ve only fallen 2% on a yearly basis.

The capital goods segment was the only one of the three segments showing expansion, growing 2.6% over August and 11.8% year-over-year. But that’s coming from a low base.

However, aside from the fact that industrial production is a lagging indicator, Brazil’s industrial production in particular has been jumping up and down in the ±2% range, so the only surprise this time around is that the indicator was flat.

Sector performance mixed

Out of the 27 segments covered, 15 showed increases. The strongest sectors were food and autos. On the other hand, the weakest sectors dropped much more than the increase in the strong sectors. Pharmaceuticals, beverages, and transportation were hit hard in August.

Implications

The data points towards a weak Q3 earnings season ahead, bad for the Brazilian market (EWZ). Plus, the weakness in consumer goods implies weakness in private consumption, which has helped Brazil stay put in the past during global downturns.

The only strong sector, capital goods, happens highly correlate with business confidence, which slid in recent months. This hints towards a slowdown in that area as well.

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