By Carlos Pallordet.

Brazil’s manufacturing industry continues to stagger. Industrial production declined by 0.9% in May on a monthly, seasonally adjusted basis, according to the Brazilian statistical agency IBGE. This was the ninth negative outturn in the last twelve months and the worst result since January 2012 when output fell by a monthly 1.9%.

The news is disappointing for two reasons.

First, it reveals that industrial production will decline in 2012 with respect to 2011. In order to remain in positive territory, industrial output needs to grow at an average monthly rate of 1.6% for the remainder of the year. This is higher than that achieved in  2009, when industrial production recovered rapidly, fuelled by ample idle capacity after the global collapse of 2008. In contrast, if monthly growth rates return to their highest levels in recent years (around 0.5%), industrial production will still decline by 2.5% annually in 2012.

Industrial output continues to stagger

Source: Timetric

Second, the fall in industrial production in May suggests that manufacturing is not responding to interest rate cuts and the stimulus measures announced by the government since the end of 2011. Market watchers had hoped that the effect of some of these incentives – such as the hike in the industrialised products tax (IPI) on imported cars, import restrictions and payroll tax exemptions – would bolster industrial production in May. But the outturn – with a broad-based fall in output across most sectors – shows this has not been the case.

Analysts are now hanging their hopes on the weakening local currency. The Brazilian real has slid by more than 15% against the US dollar since March, which should favor those sectors most affected by external competition, such as capital goods production, textiles and shoes.

Nevertheless, we believe the recovery of industrial outptut will be weak and gradual. Leading indicators – such as energy consumption, business confidence and stock levels – do not bode well for the manufacturing industry. Even if the government announces new stimulus measures, as expected, they may not be able to outweigh depressed exports and a moderation in domestic demand.

With industrial output down by 3.4% on a year-to-date (YTD) basis, it is surprising that the market consensus still foresees positive industrial production growth of 0.4% this year, according to the latest central bank survey. We expect this estimate will continue to be revised down, moving into negative territory in the next few weeks.

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