Letter IEDI n. 1163—The industry's multiplier effect on the economic recovery of 2021
Today's Letter IEDI takes up the theme of the industry's multiplier effect on the total production of the Brazilian economy, now in the context of the resumption of activity in 2021, after the 2020 COVID-19 shock. The study, carried out by economist Thiago M. Moreira at the request of IEDI, updates the discussion presented in Letter IEDI n. 1096 “Industry: a lever of growth,” of July 2021.
As is well known, last year the country's GDP growth was more than enough to offset the 2020 downturn (+4.6% versus -3.9%, respectively), due to the increase in investment and, to a lesser extent, household consumption.
In this period, the ability of industrial activity to leverage the expansion of the economy as a whole not only remained above other economic sectors, but was one of the most strengthened. In other words, the industry's multiplier increased.
Moreira's estimates indicate that the multiplier of manufacturing went from 2.14 to 2.23 between 2020 and 2021. This rise was only below that of another industrial segment, according to the classification of the National Accounts used by the IBGE to calculate GDP: civil construction, whose multiplier went from 1.84 to 2.04.
Despite some positive variation, the multipliers of agriculture (1.7 in 2021) and services (1.5) remained reasonably lower than those of manufacturing and of other industrial activities.
Thus, notably in the case of industry, the study indicates that the 2021 expansion was accompanied by an enhancement of productive linkages, that is, a reinforcement of intersectoral relations. At the origin of this movement is the evolution of the intermediate goods industry.
In the case of manufacturing, it is clear that the advance in the multiplier is explained, as Moreira observes, by the greater effect generated on manufacturing itself, that is, a higher value spent on the acquisition of national industrial inputs, especially those classified as elaborate industrial inputs, which include rubber, plastic, chemicals, metallurgical products and paper and cellulose.
Perhaps the main cause of the rise in the density of intersectoral industrial relations, responsible for increasing the multiplier effect on the Brazilian economy, was the bottlenecks of global value chains, still very present in 2021.
Successive waves of COVID-19 contagion, accompanied by more or less restrictive lockdowns in different countries, disorganization of international logistics and changes in the final demand of households led to supply disruptions, delays in imports and rises in the cost of inputs, stimulating the search for domestic suppliers. In the case of Brazil, exchange rate depreciation was an additional incentive.
According to a Feb'21 CNI survey, out of the total number of general industry companies surveyed that did import inputs, 65% found it difficult to obtain them, even when paying more. This share increased to 72% in the Oct'21 survey. In the case of construction, this figure was even higher, 79% and 80%, respectively. In May'22, a new CNI survey showed that 40% of industrial companies and 54% of construction firms were looking for domestic suppliers to replace foreign partners.
It is also worth mentioning, as the author of the study does, that the capital or investment goods' segment—that is, the sector of machinery and equipment—also registered an important expansion in 2021, which suggests a closer relationship between national intermediate goods and investments in the Brazilian economy. The production of inputs for capital goods was among the segments of the intermediary industry that grew the most last year.
Another aspect mentioned in the study was the increase in inputs' relative prices vis-à-vis the prices of finished products, largely due to the aforementioned shortage of parts, components and raw materials. When this type of relative price imbalance happens, there is an additional factor for the increase in multiplier effects.
In any case, the rise in the density of production chains seems to have been temporary. With the gradual easing of logistical problems and the drop in the cost of sea freight, foreign trade flows started to grow more significantly from the end of 2021. Data from the first half of 2022 show that imports of inputs are on the rise, while domestic production of intermediate goods declined 2.1%, as discussed in Letter IEDI n. 1155.
The most elaborate intermediate goods, precisely those that had been especially benefited by the logistics bottlenecks in international trade in 2021, recorded the largest falls.