Letter IEDI n. 1156—The leadership of services
In the first half of 2022, the control of the pandemic and the revival of face-to-face activities allowed the service sector and part of retail trade to continue expanding. The industry remained in the red, particularly affected by bottlenecks in supply chains, in addition to rising inflation and interest rates.
In Jan–Jun'22, services' real sales rose 8.8% year-on-year; real sales of broad retail, which includes vehicles, auto parts and construction material, were virtually flat, registering a variation of only +0.3%, and industrial output decreased 2.2%.
Thus, in this first half of the year, the 2.24% expansion of the general level of economic activity indicated by the IBC-Br index, which acts as a proxy for GDP evolution, was mainly due to the reaction of services. In mid-Aug'22, the expected growth rate of Brazilian GDP, according to the Focus/BCB Bulletin, was +2%.
The superior performance of services is largely due to the resumption of face-to-face activities and free movement of people, possibly thanks to the control of the COVID-19 pandemic, resulting in very robust results in some activities and with 80% of branches seeing revenue increases.
The two branches with the most significant growth in this first half of the year were services provided to households (+36.2%) and transport, their auxiliaries and post offices (+13.9%), driven by air transport (+53.9%) and land transport (+17.8%). In the latter case, the transport of cargo arising from the dynamism of exports also contributed to the result.
Another branch of services in this situation is professional, administrative and complementary services (+8.2% compared to Jan–Jun'21), since part of it is directly stimulated by the return of work in offices. This is especially the case of lower qualification services outsourced by companies, included in the component "administrative and complementary services."
In retail, the evolution in the 1st half of 2022 was more asymmetric and a smaller fraction of its branches was positive: 60%. The most significant advances were registered by those that also benefited from the return of face-to-face activities, such as fabric, clothing and footwear (+17.2%), whose sales still depend heavily on the physical presence of consumers, and books, stationery, magazines and newspapers (+18.4%), which may have been helped by the resumption of in-person school classes.
These four segments mentioned—namely, services provided to households, transportation services, retail of fabrics, clothing and footwear and sales of books, stationery and newspapers—were the only ones to expand at double-digit rates in Jan–Jun'22, as emphasized by the Destaque IEDI of August 11, 2022 [in Portuguese]. Most of them have not yet recuperated the losses of the COVID-19 pandemic and, therefore, have low bases of comparison.
In retail trade, the expansion of sales was halted by supermarkets, food, beverages and tobacco (+0.4% in the 1st half 2022)—limited by the escalation of inflation and the still high unemployment—and the branches of durable consumer goods, especially furniture and household appliances (-9.3%), construction material (-7.3%) and other articles for personal and domestic use (-2.8%), which include department stores.
Two other branches of durable consumer goods were virtually stagnant in the first half of the year: vehicles and auto parts, with +0.4%, and office, computer and communication equipment, with +0.7%.
In addition to being negatively impacted by the increase in interest rate levels in the country—since its markets is, to a greater or lesser extent, dependent on consumer credit—the recuperation of services in the consumption basket of higher-income households may also have impacted retail by attracting demand that during the pandemic sustained the performance of durable goods' sales. On the other hand, lower-income families tend to postpone the purchase of these goods in periods of budget squeeze.
As retail is an important outlet for industrial products in the domestic market, the weakening of sales of durable consumer goods has helped to slow production. The durable consumer goods industry fell the most in Jan–Jun'22: -11.7%. It is also this part of the industry that tends to suffer most from the bottlenecks in supply chains, since its production demands a large number of parts and components, many of them imported.
All other industrial macro-sectors were in the red in the first half of the year, but none of them showed a double-digit decline, remaining closer to the general industry's average: -0.9% in capital goods, -1.0% in semi-durable and non-durable consumer goods and -2.1% in intermediate goods.
Sectorally, only 30% of the 26 industrial branches monitored by the IBGE were in the black in the 1st half of 2022. In relation to the different regional parks, a slightly larger fraction managed to grow: 47%. The industry of São Paulo registered a 2.7% output drop.
The 2nd quarter of 2022, however, brought an important mitigation of losses for the industry. The 4.4% decrease in Jan–Mar'22 gave rise to a scenario of virtual stability in Apr–Jun'22: -0.2% compared to the same quarter of the previous year. In this last period, the decline in retail surpassed that of the industry, with the sector registering -0.8% in its broad concept.
Services continued to grow well, despite going through some accommodation. After real revenue expansions of +9.5% in both Q4'21 and Q1'22, the sector grew +8.2% in Q2'22, maintaining its leadership in the period by far.