Brazilian Industry Grows in 2nd Quarter

By Lisa Flueckiger, Contributing Reporter

RIO DE JANEIRO, BRAZIL – The manufacturing sector in Brazil helped to boost the flagging economy in the second quarter of 2013 and led to slightly increased GDP forecasts for the entire year. However, the positive numbers are built upon uninspiring foundations and long-term outlooks for the Brazilian economy are still relatively low.

After weak results in the last three years, the manufacturing sector in Brazil grew by two percent in the second quarter of the year compared to the first three months of 2013. In São Paulo the industry grew by 1.8 percent leading to an increase in the state’s GDP of 1.2 percent in the second trimester.

Net trade, a negative factor at the beginning of the year, recovered as well, adding 0.5 percent to Brazil’s second quarter GDP. Investments continued to push growth and added 0.7 percent. Together with the boost in industry these figures led to an increase in GDP of 1.5 percent in Q2.

The weaker real, currently standing at R$2.27 to the dollar, has helped the industry by increasing exports of manufactured goods, such as car exports which rose a staggering 22 percent in August.

“Not only has [the low real] made local producers more competitive internationally, but it has also reduced the appeal of foreign imports relative to locally-produced goods, encouraging a degree of import substitution. Going forward, we expect the real to remain weak and this will be a continued source of support for local industry,” Michael Henderson, emerging markets economist of Capital Economics, explained.

However, the increase in competitiveness is somewhat mitigated by the fact that other emerging countries such as India, South Africa and Turkey are experiencing similar currency slumps in relation to the U.S. dollar. The uncertainty created by the currency drop and the increasing costs of imports has therefore made many Brazilian companies hesitant to invest or plan for the future.

Adding to that are structural constraints within the Brazilian industry that limit the potential for further growth in manufacturing. The ‘Brazil cost’, such as weak infrastructure and numerous regulations, make it hard for local producers to increase supplies, despite estimates by the Central Bank that the real will remain low for the foreseeable future. “In fact, we think that Q2 could prove to be as good as it gets for Brazilian manufacturers,” Mr. Henderson estimated.

The current uncertainty combined with the constraints lead experts to expect the economy to slow in the second half of the year. Nevertheless, the forecasts for the 2013 national GDP have been corrected slightly upwards. Capital Economics recently lowered their GDP expectations from 2.8 percent to 2.2 percent, but are now again seeing growth in 2013 more towards the 2.8 percent region.

The Brazilian Central Bank also corrected their numbers upwards this week for the second week in a row. Four weeks ago their figures were at 2.21 percent and now they are expecting GDP growth to be around 2.35 percent for 2013.

However, estimates for next year continue to be low. The Brazilian Central Bank reduced their estimates for the third consecutive week to 2.28 percent GDP growth in 2014. Henderson agrees with the low numbers, “In any case, we continue to believe that growth will slow once again next year and are forecasting a 2.2 percent expansion in 2014.”