Letter IEDI n. 911–Recovery with loss of vitality
Brazil's GDP grew 1.1% last year, the same rate as in 2017 and in contrast to early 2018 expectations, which were much more optimistic: they pointed to a dynamism between 2.5% and 3%, according to the Central Bank's Focus survey. Thus, we are still far from offsetting the losses of the 2015-2016 biennium. This performance of Brazilian GDP contrasts with the pace of world expansion in 2018, which, according to the most recent OECD estimations released in March/19, should reach +3.6%.
This Letter IEDI analyzes the growth of our economy last year and shows that, despite the same annual rate, 2017 and 2018 were not as similar as they may seem. While the recovery process gained strength throughout 2017, ending the year with a 2.2% increase in the fourth quarter compared to the same period of the previous year, 2018 brought accommodation.
The fastest-growing period in 2018 was the third quarter; still, the year-on-year change was of +1.3% only, to some extent stimulated by the recovery of the activity level after disturbances at the end of May due to the truck drivers' stoppage.
From the perspective of output, value added increased 1.1% in 2018, while taxes on goods (net of subsidies) were up 1.4%. The three major economic sectors behaved as follows:
• Services led the growth process, with a 1.3% high, maintaining a similar pace of dynamism in Q4 (+1.1% compared to Oct-Dec/2017). The main positive influences came from trade (+2.3% vs. 2017), transport and warehousing (+2.2%) and real estate activities (+3.1%).
• Agriculture, which stood out in 2017, was practically stable last year (0.1%), even though it performed well when comparing Q4/2018 to Q4/2017 (+2.4%).
• The industry, in turn, grew in the year as whole, but very little: +0.6%. In Oct-Dec, it slipped again into negative territory (-0.5% vs. Oct-Dec/17), something that had not occurred since the third quarter of 2017.
• In 2018 industrial performance was driven by industrial utilities, 2.3%, and manufacturing, 1.3%. Mineral extraction, in turn, increased 1.0%, while construction fell 2.5%.
It should be noted that the manufacturing industry progressively lost momentum during 2018, ending up with a 1.5% drop in the fourth quarter and raising concerns about the continuity of the sector's recovery. As a consequence, we had yet another episode of reduction of manufacturing's participation in the productive structure of the country as it reached its lowest point since 1947: 11.3% of total value added.
From the perspective of expenditure, the positive highlights were mainly gross fixed capital formation (GFCF), after a long period of contraction, and household consumption, due to its weight plus a positive growth rate.
• Household consumption grew 1.9% in 2018, pulling the economy; the last quarter (+1.5%) contributed to this rate, despite the slowdown throughout the year.
• Government consumption was stable after two years of decline.
• Exports of goods and services grew 4.1% in 2018, less than in 2017, while imports increased 8.5%, which ensured the external sector contributed negatively to economic recovery.
• Gross fixed capital formation, in turn, grew 4.1% in the year, with 2013 being the last year in which GFCF had increased. However, this result reflects, in part, the accounting effects of changes in the rules of the Repetro program.
The good news is that, as a result, the rate of fixed investment stopped going down. It went from 20.9% of GDP in 2013 to 15.0% of GDP in 2017, recovering slightly in 2018 (15.8%). The bad news is that this is one of the lowest levels it has ever hit.
The low level of investment and its marginal recomposition in 2018 is a major factor blocking a more vigorous economic recovery process. Production has been unsteady, notably the industry's, a sector that, because of its intense and numerous inter- and intra-sectoral relations, affects the economy as a whole and frustrates expectations of higher growth.