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Brazilian Manufacturing Remained in Contraction in December 2015

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Jan. 5 2016, Updated 5:36 p.m. ET

Brazil’s manufacturing PMI increased to 45.6 in December

Brazil accounts for about 2.1% of the world’s GDP, and its manufacturing activity accounts for ~11% of Brazil’s GDP. According to Markit, Brazil’s manufacturing PMI (or purchasing managers’ index) increased by 1.8 points to 45.6 in December, compared to 43.8 in November.

Although Brazilian manufacturing increased in December, the reading is still below the neutral level of 50. As a result, the iShares MSCI Brazil Capped ETF (EWZ) fell 3.6% on January 4, 2016. EWZ has declined 42.6% from a year ago, making it one of the worst-performing ETFs in the emerging economies (EEM).

Ambev (ABEV), Brasilagro Companhia Brasileira de Propriedades Agrícolas (LND), Banco Santander (BSBR), and Vale (VALE) fell by 4.3%, 3.7%, 3.6%, and 4.0%, respectively, on January 4.

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Production and new orders contracted in December

Brazil’s December PMI continued to stay below the neutral mark of 50, after touching an 80-month low November. Production levels and new orders declined more slowly, but at a sharp rate. The severe downturn was seen in all three monitored market groups—consumer, intermediate, and investment goods—in December.

Due to the country’s fragile economic condition, domestic demand contracted in December. Conversely, the weak Brazilian real helped the country’s manufacturers to secure external clients. In December, export orders rose marginally.

Employment and inventories fell in December

With lower demand books, manufacturers in Brazil continued to shed jobs in December. Falling order books and cash flow difficulties led to a decrease in purchasing activity by manufacturers. Also, preproduction and postproduction inventories saw a steep decline in December.

Weak real pushed cost inflation up

While the order books in Brazil decreased, cost inflation pressures remain high. The depreciating real is leading to an increase in the cost of imported raw materials. Due to high cost inflation, selling prices also increased in December.

Declining order books and high inflation are adversely affecting the country’s manufacturers and highlights that 2016 will be the year of challenges for the Brazilian economy.

Turning from the struggling Brazilian economy, let’s take a look at Russian manufacturing activity in the next article.

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