Oh, poor Brazil. President Dilma Rouseff has turned this economy into the Rodney Dangerfield of the BRICs.
Tuesday industrial production (IP) data showed a manufacturing sector confused over inflation and expecting weaker growth. December IP fell 3.5% month over month, on a seasonally adjusted basis. Consensus was -1.7%. This was the biggest monthly contraction since December 2008, when the global financial crisis was at its peak. In yearly terms, industrial production dropped 2.3%, well below expectations of a 0.1% drop.
A closer look at the data shows poor performance across the board, says George Lei, an analyst for Nomura Securities in New York. On a monthly basis, intermediate goods were down 3.9%, consumer goods 2.5% lower and capital goods fell 11.6%. Although the reading for capital goods was somewhat affected by one-off factors in several truck-producing companies, the magnitude of the plunge is still concerning, particularly after an already hefty 3.5% drop in November. For the emerging markets Americas team at Nomura, the disappointing capital goods number heralds weaker investment momentum ahead.
President Dilma Rousseff of Brazil. Investors blame changes in macro-economic policy for much of the... [+]
November IP was also revised lower to -0.6% from -0.2%.
The data picture for 2013 is looking clearer, says Lei. After a relatively robust performance in the first half of last year, IP deteriorated sharply in the second half. On a quarterly basis, having expanded 1.7% in the first and 0.3% in the second, IP fell 1.3% in the third and declined 0.8% in the fourth.
Last year "proved to be another lost year for Brazilian industry, despite a short-lived recovery early in the year," Lei wrote in a note to clients today.
Tightening of financial conditions in Brazil, caused by domestic and global factors, should come to affect growth over the next 3-6 months, primarily through channels of investments. Lei said he expects investments to expand around 1.5% in 2014, versus over 6% in 2013.
Moreover, December data was not affected by the currency devaluation in Argentina.
"The ongoing situation in Argentina may have a substantial impact on Brazilian industry, as over three-quarters of Brazilian exports to Argentina are manufactured goods, and the majority of manufactured goods are vehicles and auto-parts," he wrote.
Last week, Nomura said that it expected the turmoil in Argentina to shave at least 0.2 percentage points off Brazilian growth in 2014. As IP data for the first quarter comes in, investment banks like Nomura will likely start lowering their outlook for Brazil in 2014.
