Brazil’s industrial production outlook remains moderate

In recent months, the pace of contraction of Brazil’s industrial output has slowed. The industrial production has recorded its fourth straight gain in June on a seasonally adjusted basis, while the IP has grown five times on a month basis in the first half of 2016. On a year-on-year basis, the contraction pace rebounded to the best since May 2015 and if the monthly gains carry on, the industrial production of the nation is expected to grow in 2017, noted Societe Generale in a research note.

“The index likely gained again in July (0.7 percent mom) despite continued contraction on an annual basis (SGe: -4.0 percent yoy)”, added Societe Generale.

Given the industrial production growth, the supply side of the Brazilian economic activity index rose in June by 0.2 percent in sequential terms. The export numbers early this year implies that the Brazilian real’s depreciation in last year has helped industrial output. With continued industrial production growth, the Brazilian economy might begin expanding on a sequential basis sooner than anticipated currently, according to Societe Generale.

Keeping the recent gains aside, industrial output continues to face serious challenges and even at the present rate, the contraction in the output continues to be significant and is in line with continued contraction of the economic growth.

A further rebound is expected in the second half of 2016 given the stabilizing level of business sentiment. But global and domestic demand continues to be suboptimal.

“Given the decline in domestic demand, the risks probably remain tilted to the downside. In a nutshell, the outlook for IP remains moderate at best unless a sustained growth in exports takes shape”, added Societe Generale.