Industry experiences its biggest expansion in three years.

By Rodrigo Viga Gaier

RIO DE JANEIRO, March 7 (Reuters) Brazilian industrial production grew 2,5 percent in January compared to December, above expectations and the largest monthly expansion in almost three years, but the result is still insufficient to consolidate an improvement in expectations regarding the recovery of activity.

Compared to January 2012, production grew 5,7 percent, the Brazilian Institute of Geography and Statistics (IBGE) reported on Thursday, also exceeding expectations. The January monthly result is the most significant since March 2010, when activity advanced 3,4 percent.

According to a Reuters poll, industrial production was expected to rise 1,55 percent compared to December and 4,45 percent compared to January of last year.

All usage categories showed expansion in January, with particular emphasis on the production of capital goods --linked to investments--, which rose 8,2 percent over December (the largest increase since June 2008) and 17,3 percent compared to a year earlier, interrupting a sequence of 16 negative rates in this comparison.

"The weaker base and the increase in truck and car production explain this higher level of capital goods," stated IBGE economist André Macedo. "It has an impact both from the reduced base and from the actual increase in production."

According to industry data, truck production jumped almost 73 percent in the first two months of the year compared to the same period in 2012, reaching 13,9 units.

The truck segment has been benefiting from government financing lines and programs, which also include tractors and agricultural equipment. According to IBGE (Brazilian Institute of Geography and Statistics), the production of motor vehicles grew 4,7 percent compared to December 2012, leaving behind two consecutive months of decline. Truck production alone expanded by 206,4 percent.

Besides Motor vehicles, 17 other sectors out of 27 showed growth compared to December. Among the main positive influences were Petroleum refining and alcohol production (5,2 percent) and Machinery and equipment (5,7 percent), which were other activities that stood out.

OTHER ASSETS

According to IBGE, the Intermediate Goods category saw a much more modest expansion, growing 0,9 percent compared to December and 4 percent compared to January 2012, while Consumer Goods increased by 1,2 and 4,6 percent, respectively.

Within this category, the durable consumer goods segment experienced monthly growth of 2,5 percent, while semi-durable and non-durable goods grew by 0,2 percent. Compared to January 2012, growth was 10,3 and 3,0 percent, respectively.

"The IPI [Tax on Industrialized Products] has increased, but it is still lower, which stimulates consumption, and the inventories of automakers that were used last year are already lower," said Macedo, referring to the lower rates of the Tax on Industrialized Products (IPI) that still apply to some segments, such as white goods and vehicles.

The industry diffusion index reached 52,3 percent in January, the highest level since February 2011, when it stood at 61,3 percent.

CAUTION

IBGE also revised the December data, which now show a slight increase of 0,2 percent compared to November, instead of remaining stable. As a result, the negative result for the full year 2012 decreased marginally to 2,6 percent, compared to 2,7 percent previously.

The poor performance of Brazilian industry last year occurred despite government stimulus measures, which ranged from tax breaks for consumption and production to a drop in the Selic basic interest rate to a historic low of 7,25 percent per year.

According to the government, January's performance confirms that the economy started 2013 stronger. A source from the economic team stated that the assessment is that no further major stimulus measures are needed "because we believe the measures already in place are sufficient."

The executive secretary of the Ministry of Finance, Nelson Barbosa, followed the same line of reasoning, arguing that economic policy decisions have a gradual effect and will begin to emerge throughout the year.

The positive results in January, however, have not yet fully encouraged analysts, as the sector had been experiencing quite poor periods.

"Certainly, 2013 will have a better trajectory for industry compared to last year, but it will continue to have lower growth than the average for the economy, pulling GDP down," stated Flávio Serrano, senior economist at Espírito Santo Investment Bank.

According to the latest Focus survey by the Central Bank, the market sees industrial production growing by 2,86 percent this year, below the 3,09 percent expansion expected for the Gross Domestic Product (GDP).

According to 2012 GDP data, industry contracted by 0,8 percent, while the economy as a whole grew by 0,9 percent. In the fourth quarter, however, there was slight growth in industrial activity of 0,4 percent compared to the previous three months, also according to GDP data.

One of the government's biggest concerns right now is stimulating investment, which fell by 4 percent last year. However, at the end of 2012, it began to show some recovery, although the warning lights remain on.

"Despite the strong result in January, the industry remains on an uneven recovery trajectory," the LCA team wrote in a note, adding that it maintains its projection of a 3,5 percent increase in the sector's production in 2013.

(Additional reporting by Diogo Ferreira Gomes in Rio de Janeiro and Brad Haynes in São Paulo)