Brazil & Southern Cone - March 2009 (ISSN 1741-4431)

Although industrial output tanked in January, the government is sticking to its optimistic annual GDP forecast of between 2% and 3% in 2009.

In January industrial output fell by 8.9% year-on-year, according to the National Statistics Institute (INE). According to the Sociedad de Fomento Fabril (Sofofa), however, which represents private sector manufacturers, output was down10%.  Strangely, adjusting for seasonal differences (there was one more working day in January 2008 than in January 2009), the Sofofa figure actually showed a lower fall in industrial output than the INE one.

What both agree on is that the economy is reeling from a collapse in external demand, a drop in construction activity and lower domestic consumption. It is worth noting that the INE figure was far worse than independent economists had been forecasting: they had expected a year-on-year drop of the order of 5.4%. 

The latest fall in the INE figure was the fourth consecutive month in which output has fallen and the biggest year-on-year drop in industrial output for a decade.  The problems in industry are already having an effect on jobs. Unemployment rose to 8% in November 2008 to January 2009. In the previous three-month period, the rate was 7.5%. Furthermore, a year ago, the unemployment rate in the November-January period was 7.2%. The acting finance minister, Alberto Arenas, argues that no-one should be surprised by the poor figures, given what is going on in the world economy. (Arenas is standing in for Andrés Velasco, after Velasco's infant daughter was badly injured in an accident.) 

The poor industrial output and unemployment figures suggest that the economy probably contracted in January, for the first time since March 2002. In December 2008, it grew 0.5%, the weakest year-on-year growth figure for the month since 1998. Arenas argues that though the first half of 2009 may be difficult, things will pick up in the second.

The government is hoping that effect of its US$4bn stimulus package on domestic demand will be felt by then. The bulk of the government money is due to be spent on so-called “high impact" projects, such as new roads and bridges.  The construction industry, in particular, needs all the help it can get. The authorised building area fell by 36% year-on-year, in January.  Equally worrying was the 1.2% fall in electricity generation. The main reason for this was a fall in production at thermal power stations. Hydro-electric power generation was up 11.2% year-on-year in January. 

• Central bank -  The central bank is likely to cut rates again at its next monetary policy meeting, which concludes on 12 March. At its previous meeting, the bank cut rates by a thumping 250 basis points to 4.75%. The consensus now is for a cut of between 75 and 100 basis points.