Letter IEDI n. 1044–Recovery and its challenges
The Brazilian economy has been growing without interruption since May, compensating a good part of the losses caused by the initial COVID-19 shock of Mar–Apr 2020. Until September, however, this process remained incomplete and important challenges to the pace of recovery still needed to be overcome.
The industry and retail trade have already surpassed their Feb/20 levels of activity, but the service sector, whose recovery is essential for the reduction of the high unemployment the country is facing, remains 8% below its pre-crisis revenue level.
In addition, even with low bases of comparison, services registered signs of some loss of dynamism in Sep/20, growing +1.8% versus +2.8% in Aug/20, after seasonal adjustment. The branch of professional, administrative and complementary services, which are demanded by companies, was again in the red, while others, like transportation, made little progress.
Much of this limited recovery of services derives from the fact that the sector brings together some of the activities most affected by social isolation and the population's loss of income. Branches that require direct contact or are based on people's mobility find it difficult to normalize while there is risk of contagion with the new coronavirus. The lower level of general economic activity also restricts the revival of the branches most linked to the economic cycle.
Retail was another sector to present accommodation in Sep/20, varying only +0.6% in its narrow concept and +1.2% in its broad concept (which includes automotive and construction material sales), seasonally adjusted, although 70% of its branches were in the black. Two reasons for this performance can be highlighted. First, the "basis of comparison" factor no longer contributes in the same way as before to obtaining higher growth rates.
This is because the fall of Mar–Apr/20 due to COVID-19 was largely eliminated in August. Now in September, the level of real retail sales is 7.7% above that of Feb/20 in its narrow concept and 2.9% above in its broad concept.
The second reason for the loss of pace in retail was the decline in sales of supermarkets, food, beverages and tobacco. From Aug/20 to Sep/20, they fell 0.4%, their third negative result. In addition to the easing of social isolation, which has reduced home consumption, the increase in food inflation in recent months may have contributed to this.
The industry, which is a key part to leverage the GDP recovery and the generation of quality jobs and to balance public accounts, given its high tax burden, managed to grow +2.6% in Sep/20; that is, like the other sectors, it expanded less than in Aug/20 (+3.6%), but this was mainly due to the extractive sector (-3.7%).
Of the 15 industrial parks monitored by the IBGE, production increased in 11 of them in Sep/20 (73% of the total) and 58% have already managed to return to pre-COVID-19 levels. Important parks such as São Paulo (+5% compared to Aug/20) and the southern states, as well as Amazonas and Espírito Santo, grew well above the national average.
With these developments in the main sectors of the economy, the Central Bank's IBC-Br Index, which acts as a proxy for GDP, showed a +1.3% expansion of the general level of economic activity in Sep/20, in line with the figure for Aug/20. If this pace is maintained, it will take another two months for the indicator to return to the level of Feb/20. For now, it is 2.5% below.
The point is that the coming months will be marked by challenges to be overcome for this to happen. This is the case of the reduction in the amount of emergency aid to families from R$ 600 to R$ 300 in the last quarter of the year, high unemployment and higher corporate indebtedness, as well as the occurrence of a second wave of contagion in certain parts of the world, such as Europe, which may harm the performance of our exports. The expectations of the Focus/BCB bulletin on Nov 13 pointed to a 4.66% GDP drop in 2020.
The full text is available in Portuguese.