UPDATE 1-Brazil's industry tumbles in August, erasing 5 months of gains
(Adds details, background on report, Brazilian economy) By Silvio Cascione BRASILIA, Oct 4 (Reuters) - Brazil's industrial output dropped more than expected in August as automobile production and food processing contracted sharply, erasing five straight months of gains and frustrating hopes of a quicker exit from recession. Production fell 3.8 percent in August from July after seasonal adjustments - its biggest monthly drop since January 2012. The plunge was bigger than all 20 forecasts in a Reuters poll, statistics agency IBGE said on Tuesday. Output fell in 21 of the 24 sectors covered by IBGE. The widespread decline suggested Brazil's worst recession in at least eight decades continued in the third quarter despite signs of business confidence improving on the prospect of budget reforms by new President Michel Temer. The sharpest drop in industrial activity was in the manufacturing of durable consumer goods, which fell 9.3 percent from July. Automobile output tumbled partly due to a stoppage at a Volkswagen AG plant near Sao Paulo, according to economists with Capital Economics in a research note. A long-running supplier dispute led VW to shut assembly lines temporarily in Brazil, deepening the national auto industry's worst crisis in decades. Output of capital goods edged up 0.4 percent, however, suggesting a recent recovery in corporate investments has remained steady, which could boost a future economic recovery. Production in August dropped 5.2 percent from a year earlier , compared with a 6.6 percent decline in July. Economists in a weekly central bank poll are projecting industrial output to fall about 6 percent in 2016. Production is forecast to grow about 1 percent next year, helping sustain a modest economic recovery as inflation is expected to ease and the central bank prepares to cut interest rates. Brazilian manufacturers have slashed production by more than 20 percent from its 2013 peak, IBGE said. A recent strengthening of Brazil's exchange rate could limit the industrial recovery. A purchasing managers' survey on Monday showed export orders fell at the sharpest pace in more than seven years in September, after the Brazilian real gained more than 20 percent so far this year. (Reporting by Silvio Cascione; Editing by Bill Trott)
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