Brazil's Industry Strengthening or Slowing, Depending on Who You Ask, But Consumer Expectations at High

Industrial production in Brazil rose 0.7% in August, according to the official Institute for Brazilian Geography and Statistics (IBGE), in a report out this morning. This followed a similar 0.7% gain in July, more than offsetting a 1.1% decline in June.

In the August result, capital goods and consumer durables were the sources of strength, the former up 2.8% and the latter, 1.6%. Intermediate goods output increased 0.6% as did the combined semi-durable and nondurable consumer goods.

Press coverage of these data was contradictory, giving an almost comedic vision of the "two-handed economist". One news service, which conducts a forecast survey, said the 0.7% total increase was "stronger than expected" by its survey, which looked to a 0.5% rise. This service highlighted the favorable impact on the real economy of much lower interest rates. Indeed, the overnight "Selic" interest rate averaged 14.66% in August, down from 19.75% a year ago and the lowest in the 20-year history of this money-market rate.

"On the other hand", another prominent wire-service bemoaned "slowing growth", noting that the year-on-year gain in August IP was "just" 3.2%, less than July's 3.5%. Various other time span comparisons can also be construed as suggesting the onset of less vigorous growth. This news service "blamed" the strengthening of the currency which makes Brazil's products less competitive; indeed, the JP Morgan real effective exchange rate averaged 141.1 (2000=100) in September, among the highest single monthly values in the series, which extends back to 1970.

Differing interpretations can support either of these views. What does seem apparent to us is that Brazilian output swings widely: the recent pattern in industrial production can be seen as slow relative to double-digit gains in mid-2004 or stronger than the nearly stagnant performance in mid-2005. However, through this recent period, interest rates have been declining, the currency has been stronger (albeit with smaller gains than last year), and the stock market has corrected modestly after a steep run-up. This financial backdrop is yielding an inflow of capital funds for investment even as the current account remains in comfortable surplus. This sounds fairly attractive to us. The Brazilian people seem to agree: the National Confederation of Industry released its quarterly consumer confidence survey this morning as well. Its index of consumer expectations surged 5.8 points to a record in Q3 as respondents' assessments of nearly every macroeconomic measure were increasingly favorable.