Industrial production (IP) contracted 5.9% yoy (-2.4% qoq) in Q1 – the worst decline in IP in nearly six years. Moreover, the pace of contraction has risen over past couple of quarters and, given the shape of domestic and external demand growth, it would be prudent to expect continued negative prints on IP over the next few months (if not quarters). The model, based on past movement in IP growth and the current pace of development in trade data, puts April IP growth at -4.6% yoy (0.2% mom). The pace should be broadly consistent with the estimate of yet another sequential GDP contraction in Q2. Industrial production declined by 3.2% in 2014 after modest growth of 2.1% in 2013. This was mainly the result of the manufacturing sector’s lack of competitiveness (reflected in Brazil’s falling external balance) and, more recently, falling domestic demand. While the BRL has depreciated significantly over past few quarters (recent appreciation notwithstanding), further heavy depreciation is probably the only realistic way to improve competitiveness in the medium term and revive Brazilian manufacturing. However, given pass-through concerns and the ongoing fight against stubborn inflation, policymakers seem unimpressed with this prospect. Structural reforms – as and when they are implemented – to revive investment in manufacturing will likely have limited success in the medium term, particularly given the domestic and external demand environment.
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