Letter IEDI n. 907–One Step Sideways
A consistent recovery is a process that, through interactions between different sectors and economic activities, spreads through the productive system and stimulates an increasing number of regional markets, accelerating GDP growth and generating solid expectations of a more favorable future. It is this dynamic that helps to drive investment, the engine of the market economy. Unfortunately, we saw little of this in 2018.
Confidence indicators did register, at the turn of the year, a vote of confidence in the new conduct of the economy, indicating better prospects for the level of activity in the longer term. The mishaps are concentrated in the present, with signs of deceleration in important sectors of the economy, especially in the industry but also in retail trade. The situation of services has improved, but only enough to stabilize the sector.
Without greater robustness of current growth, there is also a higher risk of adverse reversals of businesses' and consumers' state of confidence, since it becomes more dependent on the effective implementation of the government agenda, not fully detailed yet.
For the time being, considering the performance of 2018, the economy operates in low gear. The IBC-Br indicator of the Central Bank, which acts as a proxy for GDP, points to growth of only 1.1% in 2018, that is, the same as the actual rate calculated by the IBGE for 2017. In other words, instead of taking one step forward, we took one step sideways.
Several more or less circumstantial factors contributed to this, such as the truckers' strike in May, the elections in the second half, and Argentina's crisis at the end of the year. The fact is that were the recovery process more consolidated, we would have been better off in this bad weather.
The industry was the sector that most reflected the loss of momentum throughout 2018. After a +5% advance in Q4/17, its dynamism weakened progressively until, once again, the sector recorded a recessive quarter at the end of the year: -1.1% in Q4/18 in relation to the same period of the previous year. As a result, its pace of recovery was halved: from +2.5% in 2017 to +1.1% in 2018. This is an obvious setback for a sector that still has a great deal of recent losses to offset.
Even if one or other industrial branch stood up in this downward process, the profusion of negative signs in 2018 was not negligible. Half of the 26 branches followed by the IBGE were in the red and, according to an IEDI study with more disaggregated data, the same occurred with 46% of 93 industrial segments. For 57% of these segments, 2018 was worse than 2017.
Regionally, industrial weakening was also widespread: for 10 of the 15 locations identified by the IBGE, the 2018 performance fell short of 2017's, although the majority (11) managed to grow in the year as a whole. What is worrying in this case is that important industrial parks, São Paulo in particular, led the downward movement. São Paulo's industry lost production in both Q3/18 (-1%) and Q4/18 (-3.7%) and was very close to stagnation in the year as whole: +0.8% against +3.5 % in 2017.
If the industry clearly took a step back, retail trade demonstrated greater resilience. But that was only because the signs of deceleration were less intense and took longer. From mid-2017 to Q1/18, real sales (in the narrow concept of retail) grew above +4%, falling to +1.6% and +1.1% in the following quarters, but speeding up slightly in Q4/18 (+2.2%) thanks to the promotions of November. In its expanded concept, which includes sales of vehicles, auto parts and construction material, retail sales continued to increase by around +4.5% in the year.
As a result, the sector repeated 2017's result in 2018: +2.1% and +2.3%, respectively, and grew slightly in the expanded concept (from +4% to +5.1%) due to sales of vehicles and auto parts. Those segments that, boosted by the release of FGTS funds and improved credit conditions, had done well in 2017 —such as furniture and appliances, clothing and footwear— lost momentum in 2018. Sales of supermarkets, food and beverages, medicines and cosmetics and other articles of personal use advanced more in 2018, aided by the relative improvement in employment and the low rate of inflation.
The only large sector of the economy to have a favorable trajectory in 2018 was services, which started to grow again in the second half of the year (+0.7%). Even so, its real turnover was not able to stay in the blue, recording a variation of -0.1% in the year, largely due to services provided to businesses, such as professionals, administrative and complementary services (-1.9%). As a result, it has been 4 consecutive years of negative annual performances for the sector as a whole. Not surprisingly, employment recovery has been very timid, after the strong destruction of job posts we went through in recent years.