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Brazil’s economy remains weak as industrial production declines

Brazil’s economy remains weak as industrial production declines

BRASILIA: Brazil’s economy remains weak as industrial production declines, weighing on its currency. Brazil’s currency is represented by WisdomTree Brazilian Real (NYSEARCA:BZF).

In April, the industrial production figure came in at an annual pace of -7.6% contraction, below the previous month’s revised reading of -3.4%, while bettering estimates for -7.85%. Since peaking at over 20% in 2010, industrial production has significantly declined within the country. Activity declined in a majority of Brazil’s industries, potentially pushing its economy even further into recession.

“Activity fell in April in 19 of the 24 economic sectors surveyed, with auto production dropping 2.5 percent from the level in March.

Output in the vehicle industry, which is a major component of Brazil’s economy, plunged by 21.9 percent over the seven months that ended April 30,” according to the Latin America Herald Tribune.

Business sentiment continues to slide alongside deteriorating factory activity. In May, the business confidence figure came in at 38.6, above the previous month’s reading of 38.5, while missing estimates for 42.2. A reading below 50 signals pessimism.

Since 2010, business sentiment has steadily fallen, seen below. As policymakers have had trouble balancing both economic growth and inflation the past few years, sentiment around the economy has steadily deteriorated.

Inflation measures have spiked higher in recent months, cutting purchasing power, and pushing the lending rate upwards. In April, the inflation figure came in at an annual pace of 8.17%, above the previous month’s reading of 8.13%, while bettering estimates for 8.22%. Since 2012, inflation has risen nearly 300 basis points, seen below. As policymakers enacted tax hikes in an effort to balance the government budget deficit, costs of basic utilities sky-rocketed.

“The inflation has been on the rise since January when the government initiated a number of austerity measures and tax increases aiming at balancing overall budget. The new taxes have raised the prices of basics like electricity, bus fares and gasoline.

The government has been trying to fight inflation by increasing the borrowing cost. In fact, since September of 2014, the Selic overnight lending rate was raised by 225 basis points to 13.25 percent,” according to Trading Economics.

Factory activity in Brazil is weakening as volatile government policy changes weigh on business sentiment. In recent months, the government has raised taxes in an effort to balance the budget, leading to rising inflation, deteriorating purchasing power of both consumers and businesses. With elevated lending rates, the economy should continue to weaken, weighing on its currency in coming months.