Brazil’s economy is set for a slowdown, with industrial production contracting in August as domestic manufacturers struggle with rising interest rates, a strong currency and a weakening global economy.
Goldman Sachs said it has revised its forecast for Brazil gross domestic product growth to 3.5 per cent this year from 3.7 per cent, which would be less than half that of 2010, when Latin America’s largest economy expanded at an Asia-like rate of 7.5 per cent.
“We have the external drivers turning less friendly and that could reinforce what was already a moderation trend,” said Alberto Ramos, economist with Goldman Sachs. “They [Brazil] cannot defy gravity. They are part of the global economy.”
Brazil’s economy remains buoyant on the back of strong growth in services, which accounts for about two-thirds of the economy, compared with only 15-20 per cent for the industrial sector.
Retail sales are still expanding as consumption continues to boom. But Brazil’s strong currency, which in spite of recent falls remains firm against the dollar, has made it difficult for domestic manufacturers to compete with cheap imports, particularly from Asia.
August industrial production slumped 0.2 per cent compared with a month earlier, signalling stagnation or a contraction in the September quarter for Brazilian manufacturing.
A contraction would mark the second quarter in a row in which industrial production has declined compared with the previous three-month period and would point to a recession in domestic industry.
“Industrial activity has been disappointing since 2010, indicating that imports are helping to close the gap between supply and demand,” Guilherme Loureiro, Barclays Capital economist, said in a research note. “Recently, business confidence has been suffering with the spike in market volatility, which, in turn, could be a stronger drag on industrial activity in the coming months.”
The automotive sector has being among the worst hit by the slowdown, with carmakers involuntarily building up inventories.
While consumers remain bullish in Brazil, Goldman’s Mr Ramos said falling commodity prices and shrinking capital inflows will act as a brake on growth.
“If commodity prices come down and if global sentiment remains weak, we could see those capital inflows starting to soften and commodity prices starting to soften – those have been very important drivers of performance in Brazil,” he said.
The central bank has already pre-emptively started cutting interest rates but if growth slowed to below “trend” levels of 3 to 3.5 per cent, the government would step in with more aggressive monetary easing and possibly fiscal measures, he said.
Source: www.ft.com
Goldman Sachs said it has revised its forecast for Brazil gross domestic product growth to 3.5 per cent this year from 3.7 per cent, which would be less than half that of 2010, when Latin America’s largest economy expanded at an Asia-like rate of 7.5 per cent.
“We have the external drivers turning less friendly and that could reinforce what was already a moderation trend,” said Alberto Ramos, economist with Goldman Sachs. “They [Brazil] cannot defy gravity. They are part of the global economy.”
Brazil’s economy remains buoyant on the back of strong growth in services, which accounts for about two-thirds of the economy, compared with only 15-20 per cent for the industrial sector.
Retail sales are still expanding as consumption continues to boom. But Brazil’s strong currency, which in spite of recent falls remains firm against the dollar, has made it difficult for domestic manufacturers to compete with cheap imports, particularly from Asia.
August industrial production slumped 0.2 per cent compared with a month earlier, signalling stagnation or a contraction in the September quarter for Brazilian manufacturing.
A contraction would mark the second quarter in a row in which industrial production has declined compared with the previous three-month period and would point to a recession in domestic industry.
“Industrial activity has been disappointing since 2010, indicating that imports are helping to close the gap between supply and demand,” Guilherme Loureiro, Barclays Capital economist, said in a research note. “Recently, business confidence has been suffering with the spike in market volatility, which, in turn, could be a stronger drag on industrial activity in the coming months.”
The automotive sector has being among the worst hit by the slowdown, with carmakers involuntarily building up inventories.
While consumers remain bullish in Brazil, Goldman’s Mr Ramos said falling commodity prices and shrinking capital inflows will act as a brake on growth.
“If commodity prices come down and if global sentiment remains weak, we could see those capital inflows starting to soften and commodity prices starting to soften – those have been very important drivers of performance in Brazil,” he said.
The central bank has already pre-emptively started cutting interest rates but if growth slowed to below “trend” levels of 3 to 3.5 per cent, the government would step in with more aggressive monetary easing and possibly fiscal measures, he said.
Source: www.ft.com
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