Brazil industrial production declining at faster pace this year

Brazil's industrial production (IP) is estimated to have declined by -6.7% yoy (-1.8% mom) - the worst rate since June 2014. As a result, the six-month average is expected to deteriorate further to -4.4% from -4.1%.

The continued deterioration in IP growth suggests that the economy has contracted at an accelerated pace in recent months. This is consistent with the Q1 growth estimate of -1.1% qoq.

Industrial production declined by 3.1% in 2014 after modest growth of 2.1% in 2013. This was mainly the result of the manufacturing sector's lack of competitiveness (reflected in Brazil's falling external balance) and, more recently, falling domestic demand.

While the BRL has depreciated significantly in recent months, further heavy depreciation is probably the only realistic way to improve competitiveness in the medium term and revive Brazilian manufacturing.

However, given the pass-through concerns and the ongoing fight against stubborn inflation, policy makers seem unimpressed with this prospect. 

Societe Generale says structural reforms - as and when they are implemented - to revive investment in manufacturing will likely have limited success in the medium term, particularly given the domestic and external demand environment.