Letter IEDI n. 912–Industry receding
There was a relative consensus that overcoming the industrial crisis of the 2014-2016 triennium would be a slow process, unlike previous episodes of recovery. But, recently, it has become very clear that, in addition to being slow, it will also be a discontinuous process.
During 2018 the industry steadily lost momentum, from the beginning of the year until the last quarter, when it returned to negative ground with a fall of -1.1% in relation to the same period of the previous year. Now, in January 2019, this trajectory not only continued but deepened, with a decrease of -2.6% against Jan/18. Compared to Dec/18, the result was -0.8%, after seasonal adjustment.
Although some branches contributed more to the setback in early 2019 —such as pharmaceuticals and the machine and equipment industry— the diffusion of negative rates was significant in January, whatever the comparison. Relative to Dec/18 (with adjustment), there were losses in 13 of the 26 branches surveyed by the IBGE, while in comparison with Jan/18 the balance was even worse: 18 of the 26 were in the red.
Moreover, industrial macro-sectors recorded mainly negative results. Durable consumer goods escaped the trend when compared to Dec/18 (seasonally adjusted), but all four macro-sectors declined in relation to Jan/18, notably capital goods (-7.7%), driven by capital goods for the industrial sector (-9.5%), and durable consumer goods (-5.5%), due to the poor performance of automobiles and "brown line" appliances.
Regionally, 10 out of 15 areas surveyed by the IBGE recorded negative results in Jan/19 compared to Jan/18. The Southeast, the largest industrial pole in the country, is at the center of the recent deterioration. Indeed, the highlight is São Paulo, which has been systematically declining since September last year. The strength with which the industry of the state decelerated in Jan/19 was not negligible: -5.3% compared to the same month last year.
Since 2018, specific factors have contributed to the interruption of industrial growth, such as the truck drivers' strike and Argentina's crisis. The shrinkage of industrial results, however, was already ongoing and entered 2019. Now, the lack of solid foundations to support the recovery of the industry has become explicit, in spite of the recent improvement in the confidence of entrepreneurs and consumers.
On the household side, unemployment at very high levels and a timid increase in real incomes acted as obstacles. So much so that consumption growth in 2018, according to GDP data, remained practically at the same level as in 2017. Credit, important for expanding the durable consumer goods market, continues to flow, but at a still very high cost. Average interest rates on loans to households have virtually stopped falling since the middle of last year.
On the corporate side, there is little room for a substantial resumption of investment, given the current levels of idle capacity, low demand growth and adverse financing conditions. BNDES loans, a traditional source of long-term resources, remain in sharp contraction. The production of capital goods for the industry itself, for example, registered a decline in late 2018 and again in January 2019.
A greater contribution to the reactivation of the industry could come from the external sector. However, Brazilian exports of manufactured goods have also grown less in the face of the Argentine crisis (with negative effects on our auto industry) and as a result of an increasingly complicated international trade environment, mainly due to tensions between the United States and China.
This picture could have been different if we had not neglected our external competitiveness so much. Tax reform is a first-rate need to put national goods on an equal footing with foreign products. Leveraging infrastructure investments is another key element, not only because they improve supply conditions, but also due to the demand they generate, helping to accelerate the recovery of the industry and the economy as a whole.