Brazil in Recession, with Industry Due to Shrink 1.7% in 2014

Pernambuco port in Brazil Industrial-activity data released this week added to worries that Brazil’s economy, already in recession, is far from a strong recovery. The trade group National Confederation of Industry, CNI, said revenue for the Brazilian manufacturing sector fell 5.1% in July from a year earlier and rose 1.2% from June.

The economy is in worse shape than the group believed earlier in the year and will result in Brazil’s industrial sector shrinking 1.7% from 2013, CNI said, compared with its previous estimate of a 0.5% contraction. The change in the estimate “is caused by a strong retraction in investment and recent industrial data,” CNI economic policy manager, Flavio Castelo Branco, said to reporters.

One reason for the decline in revenue in July is that there were fewer working days in the month this year because of holidays declared during the soccer World Cup tournament, which was held in Brazil in June and July, according to Mr. Castelo Branco.

There were 2.3% less working hours in Brazil in July compared with a year earlier. CNI data also showed that industrial-capacity usage fell to 81% in July from 82.4% a year earlier.

The industrial data fit into the picture of a struggling economy. After shrinking for two consecutive quarters in the first half of the year, Brazil is heading to a anemic 0.5% GDP growth this year, according to a central-bank survey with forecasters.

“The manufacturing sector should have a small recovery in the third quarter versus the second, but it will still be a contraction in the 12-month period,” said Pedro Raffy Vartanian, a professor of economics at São Paulo-based Mackenzie University.

Finance Minister Guido Mantega has said the first-half slump was due to a sputtering global economy, and that early indicators show Brazil recovering in the second half. But many economists in the private sector say the problems are homegrown and any recovery will tend to be slow.

“The business environment has deteriorated as the government implemented pro-consumption measures in the past few years, but failed to promote needed reforms in other sectors,” Mr. Vartanian said.

A change in economic policy might be around the corner, as Brazilians head for general elections in October. Even if incumbent President Dilma Rousseff wins a second term, analysts expect her to immediately announce policy changes.

But economists predict that whoever is in power will have to push tough reforms, including an urgent increase in fuel prices to pull up Petrobras, that will likely damp growth prospects in order to tame inflation.

Brazilian consumer prices are rising at a 6.5% annual pace, which is the ceiling of the central bank’s target range, and the bank has had to raise its benchmark interest rate to 11% from 7.25% to bring inflation down.

“In 2014 we have inflation at the top of the target-range and the central bank raising rates. All that contributed to a negative environment for the productive sector,” CNI’s Mr. Castelo Branco said.

Mercopress

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