Brazil Macro Watch: Key indicators show first signs of Argentine effects

After a weak first half of 2019, industrial production in Brazil started the second half of the year in disappointing fashion, a trend that could continue due to the problems in neighboring Argentina.

 

Despite the low base of comparison, industrial production was down 2.5% year-on-year in July, according to the country's statistics bureau IBGE, while in the first seven months of the year industrial production contracted 2.5%. 

 

Mining production dipped 8.8% year-on-year in July, mostly due to the effects of the collapse of the Brumadinho tailings dam operated by Vale. 

 

“Going forward, we expect the long underperforming industrial sector to slowly but incrementally benefit from the projected cyclical economic recovery driven by low real interest rates, accommodative financial conditions, rising business confidence and the expectation of firming investment spending, but to continue to face headwinds from declining activity in Argentina and a weak ARS (a key market for Brazilian manufacturing exports),” Goldman Sachs economist Alberto Ramos said in a report.

 

ARGENTINE CRISIS AFFECTING BRAZIL'S TRADE SURPLUS 

 

The ongoing economic turmoil in Argentina is hurting trade with Brazil and having a knock-on effect on Brazilian industry. 

 

Argentina is Brazil’s third largest trading partner behind China and the US. 

 

Brazil's trade surplus shrank in January-August as exports contracted more than imports in the period.

 

The trade surplus totaled US$31.8bn in the first eight months of the year, down from US$36.7bn in the same period of 2018, according to the trade and development ministry.

 

Exports dipped 5.2% in January-August, while imports were down 2.8%.

 

Although the Brazilian trade and development ministry has still not published full trade figures broken down by country, through July it was already possible to see the negative impacts of Argentina's issues in Brazil.

 

January-July period, Brazil posted a deficit of US$226mn in trade with Argentina, reversing the surplus of US$3.88bn seen in the same period of 2018. Trade with Argentina is considered highly advantageous for Brazil as most products are of high value, such as vehicles and autoparts, while exports to China and US are mostly commodities.