Brazil industrial production: The worst is not yet behind

July industrial production strongly surprised on the downside, contracting 1.5% m/m sa and consistent with a y/y print of 8.9%, coming from a downwardly revised 0.9% fall in June (previous: -0.3%). Year-to-date, industrial activity is already 6.6% lower, and despite the bad numbers for today, growth momentum picked up slightly to -1.9% 3m/3m sa, but should prove to be only temporary.

Sector-wise, industrial production was lower in all sectors, with intermediate goods leading the way and declining by 2.1% m/m sa, followed by another important drop in capital goods, of 1.9% m/m sa. This sector is lower by 27.8% y/y, and year-to-date accumulates a 20.9% contraction. It suggests that fixed-asset investments are not close to any recovery, even after the big fall in Q2 (-8.1% q/q sa).

 For August, preliminary forecast is for a further contraction of 0.3% m/m sa, due to the deterioration in business sentiment, after a period of stability in the past two months, and also lower utilization of installed capacity (Figure 2). This, coupled with high inventories levels and falling domestic demand, puts any recovery of the industrial sector out of sight.

"We stand by our view that the political crisis is far from solved and the negative feedback between it and the economic crisis should not end soon. This means that conditions for a change in confidence are not evident in Brazil, and that the worst in terms of activity is likely not yet behind us", says Barclays.