Brazil Industry Slows Down and Businessmen Ask for Less Knee-Jerk Reaction

Brazilian steel plant In Brazil, industrial activity finally slowed down in June. On the National Industrial Confederation activity index June came in at 51.8, down from 54.9 in May. That is still positive (anything over 50 is), but the fact is that the small business segment came in at 49.1. That indicates a slowdown.

The CNI survey also found that industry-wide average use of installed capacity fell in June. At 48.5 on the CNI index, it was down from 50.3 in May. And, once again, in the small business segment, it was lower at 46.1 in June, down from 48.4 in May, demonstrating a sharper downturn.

The most recent survey by the National Industrial Confederation of the industrial sector, at the end of the second quarter, found that expectations are for continued growth, but at a slower pace.

It should be recalled that Brazil’s GDP grew (“roared” is perhaps a better word) at 9% in the first quarter of 2010.

Renato da Fonseca, an executive manager at CNI, says that the roar at the beginning of 2010 was due to a government stimulus package. And now that the strong consumer incentives have been removed, there has been a cooling off as demand fell.

Fonseca points out that the Brazilian economy is also suffering from weak exports and very strong imports at the moment. A moment, he says, that calls for caution over at the Central Bank where they have a knee-jerk reaction to any sign of economic overheating: higher interest rates.

And, in fact, Brazil’s key interest rate, the Selic, did rise by 0.50 percentage points just last week; this, following two consecutive increases of 0.75 percentage points, which took the Selic from a historical low of 8.75% to where it is now: 10.75% per year – the highest interest rate in the world.

Fonseca calls for a little more creativity. Something beyond jacking up the Selic, like maybe a combination of fiscal and monetary policy modifications that will at least attempt to preserve some of the optimism in the economic segment.

“The Central Bank is using the interest rate to control demand, fearing demand will get out of control. But the industrial sector has not had any problems with demand. The problem is that higher interest rates smother investments and without investments it is supply that is in danger.”

ABr

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