Decline in Brazilian IP likely continued in Q3

Brazil's industrial production fell 6.7% yoy in Q2 (down 2.1% qoq on seasonally adjusted basis) after falling 5.9% yoy in Q1 ( down 2.4% qoq). Given the shape of domestic and external demand, the same pace of decline is foreseen in IP in H2, says Societe Generale. The one factor that could lead to some upside surprises on IP and exports going forward is BRL depreciation.

However, at present, BRL depreciation seems to have a very minor impact on external demand given the low price elasticity of Brazilian exports and considering that global demand remains depressed. Following the trade numbers, the country's IP is likely to contract by 5.9% yoy (-0.4% mom) in July implying the economy started on a bad footing in Q3, estimates SocGen.

Structural reforms - as and when implemented - to revive investment in manufacturing will likely have limited success in the medium term, particularly given the domestic and external demand environment, argues SocGen.