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Brazil’s Manufacturing PMI: Behind the Slow Rise in 2017

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Improvement in Brazil’s manufacturing PMI

Brazil’s manufacturing activity increased in April 2017, with the country reporting its first rise in manufacturing in two years amid expectations of a recovery in 2017. Brazil’s industrial output is expected to grow at a rate of 1.45%, and its GDP is expected to expand by 0.2% in 2017 and 1.7% in 2018, according to the IMF’s (International Monetary Fund) economic outlook report for April 2017. But Brazil’s economy has contracted more than 3% over the past two years.

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Manufacturing activity in Brazil

Brazil’s manufacturing activity continued to expand in April, with growth in both new orders and output now having been recorded for the past two months. In April, Brazil’s manufacturing PMI (purchasing managers’ index) level rose above the crucial 50 mark for the first time since January 2015.

The Markit Brazil Manufacturing PMI increased to 50.1 in April, up from 49.6 in March, exceeding market expectations of 49.8. But the slight rise in April indicated largely unchanged business conditions faced by producers.

But the pace of contraction in Brazil’s economy has nevertheless diminished over the past few months. The consumer and intermediate goods sectors both saw growth in April, while capital goods firms continued to contract.

New order expansion

New orders expanded for the second consecutive month in April, primarily due to improved demand conditions. Inflation for input costs as well as output charges rose at a lower pace.

Meanwhile, the relatively weak Brazilian real against the US dollar caused a slight increase in input costs and helped secure new orders.

Investment impact

Although Brazilian manufacturing increased in April 2017, its reading is still close to the neutral level of 50. The iShares MSCI Brazil Capped ETF (EWZ) has fallen ~1% in the past month (as of May 8). But EWZ outperformed major developed market ETFs (SPY) (EWJ) (EZU) in 1Q17, with gains of about 9%.

Some of the top holdings of EZU include Brasilagro Companhia Brasileira de Propriedades Agrícolas (LND), Banco Bradesco (BBD), Banco Santander (BSBR), and Vale (VALE).

In the next part, we’ll look closely at Indonesia’s manufacturing activity.

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