Brazil's industrial production likely to contract in Q2

Brazil's industrial production data for June and Q2 is due today. The country's industrial production (IP) is expected to have declined due to the fall in exports in June. 

"In fact, the seasonally adjusted series is expected to post another gain of 0.20% mom after a 0.60% mom rise in May. However, the back-to-back monthly gains on a seasonally adjusted basis will still fail to prevent the index falling by 6.5% qoq (annualised), although  this will be an improvement on the 9.0% drop in Q2. Trend-wise, and given our June forecast, IP likely declined at the sharper pace of -7.0% yoy in Q2 and 4.4% yoy in June", says Societe Generale.

In recent months, bulk of the growth deceleration has been driven by non-IP components such as services and agriculture. As a result, the standard regression result, based on IP data alone, fails to reflect the extent of the overall collapse in growth. For example, while we estimate that the supply-side economy contracted by -6.4% qoq (annualised) in Q2, the IP based regression result shows a much smaller decline of -1.0% in the same quarter.
 
While the BRL has depreciated significantly over the past few quarters, further heavy depreciation is probably the only realistic way to improve competitiveness in the medium term and revive  Brazilian manufacturing. However, given pass-through concerns and the ongoing fight against stubborn inflation, policymakers seem unimpressed with this prospect. Structural reforms to revive investment in manufacturing will likely have limited success in the medium term, particularly given the domestic and external demand environment, argues SocGen.