July 3, 2012 / 12:32 PM / in 8 years

UPDATE 2-Brazil industry shrinks for 3rd month in row

* Industrial output falls 0.9 pct in May, below forecasts
    * Year-on-year output falls 4.3 percent
    * Data reinforce expectation of rate cuts
    * June PMI hints at continued deterioration

    By Asher Levine and Silvio Cascione
    SAO PAULO, July 3 (Reuters) - Industrial production in
Brazil shrank in May for the third straight month, supporting
the case for more interest rate cuts and highlighting a
persistent challenge for policymakers as they struggle to revive
a slowing economy. 
    Brazil's industrial output slumped 0.9 percent in May from
April, government statistics agency IBGE said on
Tuesday, accelerating its pace of decline from the previous
month and falling below most analysts' already pessimistic
forecasts in a Reuters poll.
    Brazil's lagging manufacturing sector is partially
responsible for the economy's sluggish expansion in the last
three quarters, as a global slowdown hit producers already
struggling with high taxes, a shortage of skilled workers and
inadequate infrastructure.
    The world's sixth-largest economy has been relying mostly on
booming retail sales and steady growth in its services sector to
avoid a recession and protect the country's jobs. 
    But the central bank and independent analysts forecast for
2012 the worst annual economic growth for Brazil since a mild
contraction in 2009, as automakers like Mercedes and General
Motors Co start cutting payrolls.
    "Industrial output in May was a disaster. There's no better
word for it," said André Perfeito, an economist at Gradual
Investimentos in Sao Paulo, in a note to clients.
    Yields on interest rate futures fell across the
board on Sao Paulo's BM&FBovespa exchange, as the data
reinforced investor expectations for more rate cuts to below the
current all-time low of 8.5 percent.
    "Without a doubt, it's one more indicator that points to
more cuts in the coming months," said Silvio Campos Neto, an
economist at Tendências Consultoria, in Sao Paulo.
    The central bank rate-setting committee Copom will likely
cut its benchmark rate to 8 percent in its next
meeting on July 11. Analysts expect rates to end 2012 at 7.5
percent, according to a weekly central bank survey. 
    Industrial output had been expected to contract 0.7 percent
in May, according to the median estimate of 17 analysts in a
Reuters survey. In April, industrial output fell a downwardly
revised 0.4 percent, the IBGE said on Tuesday.
    The data corroborates leading indicators that pointed to
weak industrial production numbers in May. The HSBC Purchasing
Managers' Index (PMI) for Brazil's manufacturing sector
contracted in June for the third straight month and hit its
lowest level since October 2011.  
    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.
    "I see this as something that is much more structural than
cyclical. Most of it has to do with the limits and internal
problems here that need to be addressed, the elements that
increase the cost of production in the country," Neto added.
    May's industrial production fell 4.3 percent from a year
earlier, more than the 3.3 percent decline predicted
in the Reuters poll. Analyst forecasts ranged from a contraction
of 2.2 percent to 4.3 percent.
    Of the 27 industrial sectors surveyed by IBGE, 14 shrank in
May from April, including automobiles, foods, and
telecommunications equipment.
    In broader industrial categories, output of capital goods
fell a seasonally-adjusted 1.8 percent for the month, the IBGE
said. Production of consumer goods fell 2.8 percent from April,
and intermediate goods rose 0.2 percent.
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