Brazil's Economy Seen Shrinking After Industry Collapse

(Bloomberg) -- Go inside the global economy with Stephanie Flanders in her new podcast, Stephanomics. Subscribe via Pocket Cast or iTunes.

Odds that Latin America’s largest economy contracted in the first quarter increased after March industrial production fell by more than double analysts’ expectations.

Brazil’s output tumbled 1.3 percent in March, its worst reading in six months, the national statistics bureau reported Friday. In the 12 months through March, industrial production contracted for the first time since 2017.

The Brazilian economy has suffered with a disappointing recovery since emerging from a deep recession two years ago. Record-low interest rates haven’t provided the hoped-for boost to the industrial sector, which since 2017 hasn’t once posted back-to-back months of growth. With the government fiscally strapped, a wave of private-sector investment is needed to accelerate growth, but confidence has wavered since President Jair Bolsonaro assumed power. Exports to Argentina are also down as the neighboring country sinks into recession.

To read more: Brazil’s Damaged Engine Signals Disappointing Growth Ahead

Brazil’s largest private-sector banks cut their estimates for the economy in the aftermath of the data. Itau now expects gross domestic product to contract 0.2 percent in the first quarter from the previous period, while Bradesco sees it shrinking 0.1 percent.

The March industry data “definitely increases the risk” GDP contracted in the first three months of the year, said Alberto Ramos, Goldman Sachs’ chief Latin America economist. Edward Glossop, Latin America economist at Capital Economics, added that the first-quarter data is “likely to be ugly” and it appears the economy may have posted a small contraction.

Swap rates fell across the board. Interest paid on the contract maturing in January 2020 dropped 4 basis points in afternoon trade, as the weak economy suggests no scope for inflationary pressures.

What Bloomberg’s Economist Says

“The late Carnival was expected to drive some decline in industrial production versus year-ago levels -- but the plunge seen in the March reading goes beyond that. Prolonged industrial weakness despite the relatively weaker currency, record-low interest rates and subdued wage pressure is illustrative that the usual suspects are not sufficient to explain the low dynamism of the industrial sector.”
--Adriana Dupita, Latin America economist
Click here to read the research

The March plunge in industrial production was led by a 2 percent decline in output of consumer goods, particularly due to a drop in vehicles as Argentina imports fewer cars.

Stubborn, double-digit unemployment has also kept domestic demand low, hindering production, according to Flavio Serrano, chief economist at Haitong in Sao Paulo.

From the same month a year earlier, overall output fell 6.1 percent, the most since last May’s trucker strike ground the economy to a halt. The effect of the Brumadinho dam disaster in January continues to weigh on the mining sector, with output from extractive industries down 14 percent year-on-year, according to Andre Macedo, who coordinates the survey.

©2019 Bloomberg L.P.