Brazilian manufacturing remains strong in December, suggests further strengthening of operating conditions

Factories in Brazil ended 2018 on a strong footing, manufacturing goods at the sharpest rate in nine months in response to stronger sales. The seasonally adjusted IHS Markit Brazil manufacturing PMI index came in at 52.6, widely similar to prior month’s eight-month high of 52.7, suggesting a further strengthening of operating conditions throughout the sector. For the fourth quarter as a whole, the PMI average of 52.1 was the highest since the first quarter of 2018.

Domestic demand for Brazilian-manufactured goods rose sharply, supporting the surge in sales since March. Subsequently, companies increased production in December. New orders and output continued to rise in the consumer and intermediate goods categories, but capital goods makers saw renewed contractions.

Competitive pressures in external markets and ongoing economic troubles in Argentina led to renewed fall in new export orders at the end of the fourth quarter. Nevertheless, the pace of contraction was slight overall. To fulfill existing orders, and in expectation of further growth, manufacturers bought additional inputs for use in the production process. The slight rise in purchasing levels was the second in several months.

Therefore, holdings of raw materials and semi-finished items rose for the second consecutive month in December. Inventories of finished goods likewise rose, after depletion had been registered in October and November. Even if input prices rose again, the pace of inflation weakened to the softest in nearly one-and-a-half years as companies advanced from rebounds in the BRL/USD exchange rate. Therefore, manufacturers lifted their selling prices to the least degree in 15 months.

Data for December indicated an overall fall in manufacturing jobs throughout Brazil, ending a two-month sequence of employment growth. Anecdotal evidence showed that hiring attempts at some companies were countered by cost-reduction initiatives at other firms. The overall rate of contraction was just slight, however.

Sentiment in the new government, anticipations of greater market shares and investment plans were among the factors supporting positivity of output growth in the coming 12 months.