Letter IEDI n. 1005–Two months of the COVID-19 crisis
The coronavirus pandemic is causing a record crisis in the Brazilian industry in 2020. And this despite the last three years’ recovery not being able to offset all losses of the 2014–2016 period. In other words, we are witnessing an overlap of industrial crises, making the country's economic scenario much more complex and challenging, especially when a new technological revolution is advancing in the rest of the world.
From March to April 2020, industrial output decreased 18.8%, after adjusting for seasonal effects. As a consequence, in just two months the COVID-19 pandemic has already cost the industry more than ¼ of its activity. In Apr/20, output shrank 26.1% in relation to Feb/20 in the sector as a whole.
Much of this stems from the social isolation measures necessary to combat the spread of the coronavirus, but it also reflects the sharp drop in exports of manufacturing goods—which, according to the IBGE, reached -32% in Apr/20— disruptions in supply chains and high levels of fear and uncertainty, blocking investment and consumption decisions of many industrial goods.
The losses were not only intense but also widespread: all four industrial macro sectors were in the red, as were 84% of the 26 branches surveyed by the IBGE. The results were particularly bad for consumer durables and capital goods, whose production fell, respectively, 79.6% and 41.5% in Apr/20 compared to the previous month, free of seasonal effects.
Vehicle production led the losses with -88.5%, while the other transport equipment branches, which include aircraft production, had the second worst performance: -76.3%. The results of capital goods activities were not far behind, as exemplified by the -33.8% rate in electrical machines and appliances and the -30.8% in machinery and equipment.
But it was not just goods whose markets demand confidence and adequate financing conditions that showed intense contractions. Clothing (-37.5%), textiles (-38.6%), leather and footwear (-48.8%) were also among the most affected, as their consumption tends to be more easily postponed by households in times of crisis and because their production is labor-intensive, requiring greater adaptations to ensure health protection protocols.
An IEDI study with 93 industrial segments further details the figures released by the IBGE. No less than 77% of the total (or 72 segments) registered a negative performance in Jan–Apr/20 compared to the same period of the previous year. Among these, almost 20% showed falls above 20%, such as cellulose and other paper-making pulps; paints, varnishes, enamels, lacquers and related products; and maintenance, repair and installation of machinery and equipment.
The confidence indicators of industrial entrepreneurs, which remained at their lowest levels in May/20, suggest that the situation is likely to remain dire in the coming months, although there may be some mitigation due to the emergency measures of the government's economic policy and the adaptation of production lines to respect physical distance protocols.
According to the FGV, industry confidence increased from 58.2 points in Apr/20 to 61.4 points in May/20 and capacity utilization rose 3%. Still, confidence remains below the 100-point mark, indicating strong pessimism, and capacity utilization is well below the historical average of 80%.
Apparently, the demand contraction, due to the increase in unemployment and falling income, and changes in the organization of production will continue to affect the performance of the industry in the months to come. Projections in the Focus/BCB Bulletin point to a drop of -4.83% in industrial output and to -5.35% in industrial GDP in 2020 as a whole.