Brazil's Q2 industrial production likely worse than Q1

Brazil's industrial production (IP) fell by -6.4% yoy in the first four months this year including a -7.6% yoy decline in April. Assuming this rate sustains for the rest of the year the supply side economic activity index should fall by -1.5% in 2015 (close to Societe Generale's full year growth forecast of -1.6%). 

However, year-to-date economic activity has collapsed (-2.4% yoy through April) slightly more than predicted by the model and continues to add to the downside risks to their growth forecast although they believe economy will do slightly better in H2, says Societe Generale. 

Given the trends in trade and the initial survey-based releases, SocGen estimates IP to decline by -6.8% yoy in May leaving the year-to-date collapse unchanged at -6.4%. Sequentially, IP is expected to post yet another significant decline in May (-0.7% mom) after a serious fall in April (-1.1% mom). These numbers are broadly in line with the bank's Q2 growth estimate of -7.9% qoq (at an annualized rate). 

Industrial production declined by 3.2% in 2014 after modest growth of 2.1% in 2013. This was mainly the result of the manufacturing sector's lack of competitiveness (reflected in Brazil's falling external balance) and, more recently, falling domestic demand. While the BRL has depreciated significantly over the past few quarters (recent appreciation notwithstanding), further heavy depreciation is probably the only realistic way to improve competitiveness in the medium term and revive Brazilian manufacturing. However, given pass-through concerns and the ongoing fight against stubborn inflation, policymakers seem unimpressed with this prospect. 
Structural reforms - as and when they are implemented - to revive investment in manufacturing will likely have limited success in the medium term, particularly given the domestic and external demand environment, added SocGen.