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UPDATE 3-Brazil June industrial output edges up, misses forecast
August 1, 2012 / 12:35 PM / in 5 years

UPDATE 3-Brazil June industrial output edges up, misses forecast

* Industrial output rises 0.2 pct in June, below forecasts

* Suggests stimulus, lower interest rates slowly taking effect

* Production falls 5.5 percent from year earlier

By Asher Levine

SAO PAULO, Aug 1 (Reuters) - Brazil’s industrial output edged up less than expected in June after three straight months of decline, suggesting the central bank may need to take more action to boost the country’s lagging manufacturing sector.

Industrial production expanded 0.2 percent in June from May , government statistics agency IBGE said on Wednesday, less than the 0.8 percent expansion forecast in a Reuters poll of 17 analysts.

June was the first rebound after three straight months of declining output, as manufacturers continue to struggle with high taxes, a shortage of skilled workers and inadequate infrastructure. In May, industrial output fell 1 percent, revised down from 0.9 percent, the IBGE said on Wednesday.

“We are seeing a turnaround after an inflection point, after having negative growth for several consecutive months,” Brazil Finance Minister Guido Mantega said on Wednesday. “From here on we will see better results.”

Intent on reviving growth, President Dilma Rousseff’s administration has chopped central bank benchmark interest rates to an all-time low of 8 percent, provided industries and consumers with tax breaks, and vowed to step up government purchases of industrial goods.

“The ball is in the central bank’s court,” wrote Andre Perfeito, chief economist with Gradual Investimentos in Sao Paulo in a note to investors. “The Selic should fall to 7 percent to help sustain investment, helping unblock a channel that is clogged due to a worsening of corporate forecasts.”

Yields on interest rate futures fell across the board following the industrial production data as traders stepped up their bets on further interest rate cuts to help stimulate growth.

Brazil’s central bank is widely expected to cute rates by 50 basis points later this month, after which it will likely keep rates stable or follow with a 25 basis point cut in October.

Still, many analysts see limits to further government stimulus as falling government revenue weighs on fiscal accounts.

“The stimulus has been effective in drawing down inventories, but we are reaching the limit,” said Mauricio Rosal, chief economist with Raymond James & Associates in Sao Paulo. “As I see it, a sustainable recovery in industry will only occur when the credit market unlocks and local demand reacts. I wouldn’t put a lot of faith in a recovery of external demand--there is a serious structural problem there.”

So far, mining and steel companies said they are expecting only a very gradual recovery in coming months after reporting dismal second-quarter performance. Vale, the world’s largest iron ore producer, saw profit tumble 59 percent in the quarter after demand for the mineral plummeted in China, warning that the situation will spill over into coming quarters.

Other companies, including flat steel producer Usiminas , also reported weak results because of the rising cost of goods sold and a decline in the currency, which drove financing costs and other expenses higher. Companies such as Fibria, the world’s largest producer of pulp, had trouble bringing down the value of their debt, and vowed to cut investment to protect their balance sheet against market swings.

Other leading indicators for the manufacturing industry, such as HSBC’s Brazil Manufacturing purchasing managers’ survey, suggest weakness will continue in the sector. The index fell in July for the fourth month in a row, to 48.7, below the 50 mark that divides growth from contraction.

June’s industrial production fell 5.5 percent from a year earlier, more than the 4.3 percent decline predicted in the Reuters poll. Analyst forecasts ranged from a contraction of 2 percent to 5.3 percent.

Of the 27 industrial sectors surveyed by IBGE, 12 expanded in June from May, including pharmaceuticals, automobiles, and other types of transportation equipment.

In broader industrial categories, output of capital goods rose a seasonally adjusted 1.4 percent for the month, the IBGE said. Production of durable consumer goods rose 4.8 percent from May, and intermediate goods fell 0.9 percent.

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