It May Take More Than Stimulus To Arrest Brazil's Slowdown

As is the case with China and India, we are now seeing material deterioration in Brazil's business conditions, particularly manufacturing. The June manufacturing PMI is showing some unexpected weakness.


HSBC/Markit: June data indicated a further deterioration in manufacturing business conditions in Brazil. Both output and new orders fell over the month, with the rates of contraction the strongest in eight months. Manufacturers generally commented on weak client demand. Concurrently, job losses were reported for the third month running...
 
Today's Industrial Production number came in considerably weaker than expected - down 4.3% YOY vs. 3.3% expected.

GS: The industrial sector has been beset by higher costs (e.g., labor), soft domestic and external demand, and external competitiveness issues related to a still overvalued BRL.
 
The government has been pushing through quite a bit of stimulus to halt economic contraction.

Reuters: Intent on reviving growth, President Dilma Rousseff's administration has chopped central bank benchmark interest rates, provided industries and consumers with tax breaks, and vowed to step up government purchases of industrial goods.
 
In anticipation of further rate cuts, the yields on government bonds have come off sharply. As the chart below shows, the 1-year yield is at a multi-year low.

Bloomberg: The central bank has cut its target lending rate by 4 percentage points since August, the most among the Group of 20 nations, to a record low of 8.5 percent. Traders are betting policy makers will reduce the benchmark to 7.75 percent by the end of next month, interest-rate futures yields indicate.
 
Some analysts are suggesting that if Brazil's currency weakens further (BRL is down 16% from this year's highs), Brazil's manufacturing may regain its competitiveness. But as with other emerging market economies, years of strong growth have covered up some structural problems that may not be simply patched up by lower rates, weaker currency, or other government stimulus.
 
WSJ: [Paulo] Leme [chairman of Goldman Sachs in Brazil], said Brazil's problems may go deeper than a sluggish global economy. Poor infrastructure, lagging educational standards and other structural problems held back Latin America's biggest country. "The country has a lot of room to grow...but it needs to resolve its own inefficiencies."