Letter IEDI n. 1035–Moderation in Industrial Rebound
The industry continues to recover after the COVID-19-driven shutdown of many production units in late March and April 2020. It's been four consecutive months of growth. In August, however, there was a significant slowdown, before the pandemic losses being fully offset and, also, before the implementation of cuts to the emergency aid program, which has been stimulating the markets.
From July to August, after eliminating seasonal effects, industrial output grew +3.2%, that is, less than half the rate observed in the previous month (+8.3%). As a result, the sector remained 2.6% below the production level of Feb/20, which preceded the outbreak of the new coronavirus in Brazil.
This accommodation reflects higher bases of comparison, but also several other factors that are still present and negatively affect the sector, such as weak demand, the need for health security protocols, difficulties in obtaining inputs in certain sectors, high uncertainty about the continuity of emergency programs, etc.
Of the 26 branches monitored by the IBGE, 10 (38% of the total) failed to grow in Aug/20, a higher proportion than in the previous months, and 16 branches (62% of the total) are not yet back to pre-crisis levels.
Among the macrosectors, only intermediate goods are above the figure for Feb/20, although all of them managed to grow from July to August. The highlights were durable consumer goods, the only sector to maintain a double-digit growth rate (+18.5%), and capital goods (+2.4%), despite a great loss of dynamism compared to the previous month (+16%).
Let's wait to see if, after a few months of recovery, this figure for capital goods is a symptom that the Brazilian economy is back to a context of low dynamism of investment in machinery and equipment. If so, the result will be weaker economic growth.
Semi and non-durable consumer goods, on the other hand, remained practically flat, registering +0.6% in relation to Jul/20, with seasonal adjustment, under the influence of the falls in beverages and cleaning products, personal hygiene goods and cosmetics and the low growth in food. Intermediate goods grew only +2.3%, due to the poor performance of pharmaceuticals and pharmachemicals, and other chemical products.
Even though the weak August performance triggers a yellow light about the pattern of industrial growth in the post-pandemic, there are some recent favorable signs. One of them is the low level of inventories in the vast majority of industrial sectors (88% of the total, according to the CNI).
This may momentarily reinforce the increase in production costs, mainly due to the exchange rate devaluation, but it also opens the way for output expansion to continue so as to meet demand and replenish inventories.
Another favorable sign is the improvement in industrial entrepreneurs' expectations, which caused different confidence indicators to move into the zone of optimism in September, including the components referring to assessments of the current situation.
This is a result of a economic performance that was not as negative as was expected at the beginning of the COVID-19 crisis. For industrial production, the projections collected by the Central Bank's Focus Bulletin at the beginning of Jul/20 pointed to a 9% drop in 2020 as a whole, but now in October they signal a 6.3% decrease. In other words, the market expects a year as bad as 2016 (-6.4%), which was part of one of the most serious crises faced by the Brazilian industry.
In order for these expectations to materialize, however, it is necessary that the industry remain on the growth path, since it registered losses of 8.6% in 2020 up to August. In any case, 2020 will close the decade in a very symptomatic way, since six out of the last ten years saw declines in production and in one output was basically flat. In fact, only in two years (2013 and 2017) was growth above 2%.