Brazil’s manufacturing sector drops for second consecutive month

May manufacturing data brings the first signs that Brazil’s economic activity has slowed down in Q2. The sector was down 0.9 percent month-on-month (the second consecutive drop) and 1 percent against May 2023, erasing gains obtained earlier this year.

The sector continues to droop, with output levels still 1.4 percent below pre-pandemic levels and almost 18 percent below its 2011 peak.

As expected, the unprecedented floods in Rio Grande do Sul, Brazil’s southernmost state, negatively influenced the overall results. 

Motor vehicles and food production, two of the activities most impacted in the state, with entire production lines paralyzed for weeks, also contributed to poor nationwide results (-11.7 and -4 percent, respectively). 

Production lines are connected across the country, and industries in many states were impacted by the Rio Grande do Sul woes. André Macedo, a research manager at the Brazilian Institute of Geography and Statistics, recalled that an automaker in São Paulo had to place line workers on vacation to mitigate the losses from Rio Grande do Sul factory stoppages. In April, the segment had posted a 13.8 percent growth.

Impacts on the production of poultry, beef, and pork, in addition to soy derivatives, in Rio Grande do Sul also contributed to the drop in food production nationwide — the activity makes up 15 percent of IBGE’s indicator.

Rio Grande do Sul is Brazil’s fourth-largest economy, accounting for 6.5 percent of the national GDP and more than 8 percent of the country’s manufacturing output.

A Central Bank dilemma ahead

If lower Q2 growth is confirmed, the Central Bank will have a dilemma ahead, points out economist and independent consultant André Perfeito. “It seems that the bank’s Monetary Policy Committee will raise interest rates due to the deterioration of expectations, since the U.S. dollar at this level will necessarily force economists to revise their inflation projections upwards. We may then see rate hikes amid weak activity.” 

And if the U.S. Federal Reserve starts cutting interest rates in the second half of the year, the Brazilian economy will be even more fragile. “The data brings a dilemma, but there is a great opportunity [for the government] to manage the communication instrument,” pondered the economist.

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