Brazil's industrial output unexpectedly grew 0.4% m/m sa in January after declining 0.5% in December, improving the trend slightly. But it still shrank 3.7% 3m/3m sa from 4%. Industrial output, in annual basis, shrank 13.8% after declining 8.3% in 2015. Production of capital goods grew 1.3% m/m sa, whereas intermediate goods production expanded 0.8% m/m sa. On the contrary, consumer goods production fell 0.9% m/m sa, which is mainly due to 2.4% m/m sa decline in durable goods.

Brazil's industrial data for January leaves a negative carry-over of 6.1% for 2016, that is, if industrial output continues to be flat throughout 2016, it will shrink by this magnitude as compared with 2015's decline of 8.3%.

"We continue to stand by our view that this year's recession should be slightly more contained than the 3.8% contraction of real GDP in 2015", says Barclays.

The growth in intermediate and capital goods can be an early sign of wide import substitution process as the unit labor cost has declined to the levels of eight years ago. This can be a solid factor helping any rebound in the industrial sector in the medium term, as opposed to the high level of inventories.