MacroScope

Brazilian industrial rebound: wishful thinking?

November 9, 2012

2012 has been a year to forget for Brazil’s struggling industry – just like the year before. But a weekly central bank survey of around 90 financial institutions says that will all change next year and industry will grow at healthy 4 percent pace.

Will it?  One year ago, the same survey predicted 4.1 percent growth for 2012. Despite massive stimulus by President Dilma Rousseff’s government, including record-low interest rates and billions of dollars in tax cuts that were off everyone’s radar, industrial output in Latin America’s largest economy is set to fall by 2.3 percent.

The same pattern happened the year before. Two months before the start of 2011, analysts expected an expansion of 5.3 percent in Brazil’s industrial output but in the end it grew by only 0.3 percent.

Have economists been overoptimistic?

Luciano Rostagno, chief strategist at WestLB in Sao Paulo, said his 2013 forecasts consider a gradual recovery of the global economy and the effects of all the stimulus provided by Brazilian authorities. His estimate for industrial output is even more positive: 5 percent growth.

But the risks are clear, he admitted.

If global economic growth remains sluggish, Brazilian entrepreneurs may postpone their investment plans even further, despite all the stimulus offered by the government.

A quick look at third-quarter corporate results suggests this is a very plausible scenario. Brazilian steelmakers such as CSN and Gerdau said they will restrain capital expenditure in new projects after posting disappointing earnings, for example.

On top of that, spare capacity in Brazilian factories is high, about one-fifth, the largest in over two years, according to the national industry association.

Nor is the global economy inspiring great hopes four years after Lehman’s meltdown. The latest Reuters poll with hundreds of economists showed the world economy should improve only modestly in 2013, despite hopes of a gradual but steady recovery in the United States and China.

Nurturing strong industry has been a top priority for decades in Brazil, whose authorities refuse to rely only on the country’s massive exports of agriculture and mineral commodities after traumatic crises caused by sudden shifts in world markets.

However, repeating the same pattern seen in many other countries, manufacturers’ share of GDP has dropped from 27 percent in 1985 to 14.6 percent in 2011, the smallest since the 1950’s, according to the Sao Paulo-state industry association.

Whether or not it succeeds next year will determine whether Rousseff, herself an economist, succeeds in jump-starting growth in the world’s sixth-largest economy.

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