October 4, 2016 / 1:42 PM / in 2 years

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
    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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