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ECONOMY-BRAZIL: Crisis Brings Slump in Industry, Agriculture

Mario Osava

RIO DE JANEIRO, Jan 15 2009 (IPS) - Forecasts that Brazil's grain harvest will be down by 5.9 percent this year and the announcement of an accumulated fall in industrial output of 7.9 percent in October-November 2008 have pricked the balloon of traditional new year optimism in this country.

A recession, defined as shrinking GDP in two successive quarters, appears inevitable given the collapse in industry indicated by figures from the governmental Brazilian Institute of Geography and Statistics (IBGE). Production in November was 5.2 percent lower than that in October, which was already 1.7 percent down on the previous month.

Negative results were not limited to a few sectors, as had been expected, but were present in 21 out of 27 activities analysed. Industry has not suffered such a reverse since May 1995, when Brazil was emerging from a long period of hyperinflation.

The automotive industry was the worst hit. In November, production fell by 22.6 percent. Capital goods like machinery and equipment, as well as basic metallurgy and mining also suffered falls of over 10 percent.

The worrisome situation of the last quarter of 2008 will continue with a "very bad first quarter" this year, and what follows is "unforeseeable" as it will depend on what happens in the global economy, as well as on internal measures to promote recovery, said University of Campinas Professor Julio de Almeida.

The credit crunch and the loss of consumer confidence have dampened demand and were the means by which the Brazilian economy has been afflicted by contagion from the global financial crisis that originated in the United States, de Almeida told IPS.

Sales of cars and other durable consumer goods, which are heavily dependent on credit, were the first to feel the blow. Assembly lines reduced output in December to a level 54.1 percent lower than in the same month in 2007 because they had accumulated a stock of 300,000 vehicles in their yards, as a result of disappointing sales in previous months.

In December, 102,100 vehicles were produced – one-third of the mid-2008 monthly production rate. To absorb the shock, 3,200 workers were let go, equivalent to 2.5 percent of the total work force, and collective holiday leave was imposed at several plants.

The motor vehicle industry affects a long production chain, from steelworks to manufacturers of electronic instruments and parts for cars, trucks, buses and agricultural machinery.

Another hard-hit sector is that of capital goods, due to the "collapse of expectations in the business sector," which also has long-term effects on a variety of industrial segments, de Almeida said.

A third factor contributing to the economic crisis in Brazil was the sharp drop in demand and commodities prices on the world market, which affected major Brazilian exports such as iron ore, paper pulp and grains, he said.

Another is the housing construction industry, which suffered "a bit" from the effects of the confidence and credit crisis that is continuing in a downward spiral this year, the analyst said.

In addition to the two financial quarters already doomed to show negative growth, the recession could be further prolonged if it extends to the food industry, which employs a large number of people and could therefore aggravate the factors contributing to the recession, de Almeida said.

Now that it has taken root in Brazil, the crisis is "a trend that is difficult to reverse, but its effects can be mitigated by favourable expectations and strong fiscal policies," including a great deal of public investment, he said. "There are no magic solutions," partly because curbing its impact will also depend on how the global economy reacts.

If the new U.S. administration of President-elect Barack Obama adopts policies that bring about improved prospects, it could be a positive factor, de Almeida, a former economic policy secretary, a strategic post in the Finance Ministry, concluded.

Agriculture will also succumb to the negative economic climate, according to IBGE forecasts. Production of cereals, beans and oilseeds are expected to fall by 5.9 percent this year to a total of 137.3 million tons, compared with 145.8 million tons in 2008.

The head of the Brazilian Agriculture and Livestock Confederation (CNA), Katia Abreu, was more pessimistic, estimating a 10 percent drop in grain production, based on weather conditions in the past few weeks which were not taken into account by IBGE, such as the drought in productive areas in the south and west of the country.

The evidence suggests a difficult year ahead in the real economy, although there have been some positive signs, like the partial recovery of vehicle sales in December in response to tax incentives granted by the government a month ago.

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