Letter IEDI n. 1218—Industry: for now, no change of course
The Brazilian industry ended the first half of 2023 without changing course. It continued to present results very close to mere stability. From May'23 to June'23, after discounting seasonal effects, the figure for the general industry output was +0.1%.
This, however, thanks to an increase of 2.9% in the extractive sector, as manufacturing, once again, lost production. This part of the industry had its third consecutive drop in the seasonally adjusted series, registering -0.2%.
As a consequence of the weak evolution of the last months, industrial production shrank 0.3% in Jan–Jun'23, losing almost all the little it had achieved in the 2nd half'22 (+0.4%).
It is a performance that reflects the high levels of interest rates in the country, as well as the significant levels of household debt. These are factors that put in risk the dynamism of branches of durable, consumption and investment goods, since their markets usually require credit.
Another hindrance has been the slowdown in the global economy, which has constrained exports of industrial products by Brazil, as analyzed in Letter IEDI n. 1217. The manufacturing industry was the only major economic sector to reduce the exported quantum in the first half of 2023 (-1.2% versus Jan–Jun'22).
In the 1st half'23, 64% of the industrial branches were in the red and, from a regional point of view, 44% of its parks lost output, including São Paulo. Production of capital goods was the main responsible for pulling down the sector as a whole, but it was not the only one.
The performance of capital goods worsened a lot compared to the second half of 2022, from -2.1% to -9.7%. And, considering the result of Q2'23 (-12.4%), a trend reversal is not on the near horizon, depending a lot on the reduction of interest rates and the expansion of long-term financing.
Capital goods for the industry itself have been in the red for even longer: output has shrunk for seven consecutive quarters in the year-on-year comparison, that is, since the end of 2021. It is a trajectory that indicates the absence of investments in the sector, causing the aging of its machinery and jeopardizing its productivity.
A recent CNI survey points in this direction. The average age of industrial machinery and equipment in Brazil is 14 years and almost 40% are close to or have already exceeded the age indicated by the manufacturer as the ideal life cycle. Without modernization, a consistent resumption of the national industry will be more difficult.
Intermediate goods were also negative in the 1st half'23, with -0.5%, as bad as in the second half of last year. Q2'23, however, brought some improvement, due to food and fuels, but, although returning to positive ground, this macro-sector is still close to stability (+0.8%).
Consumer goods, in turn, were the part of the industry that expanded in the 1st half'23 in relation to the same period of the previous year, although with clear signs of deceleration in the most recent period.
With depressed bases of comparison, durable goods came out ahead, registering +5.7%, supported by production of household appliances (+12.9%) and other transport equipment (+17.5%). In Q2'23, the pace of expansion of this macro-sector fell by half, to +2.7%.
Branches of durable consumer goods, such as computers and electronics (-9.9%), are among the largest declines in the first six months of the year, along with segments of capital goods, such as electrical machinery and equipment (-11.6%) and machinery and equipment (-5.8%).
Semi-durable and non-durable consumer goods, in turn, increased 1.8% in Jan–Jun'23, largely due to alcohol and gasoline (+9.8%) and pharmaceuticals (+11.1%). The indication coming from Q2'23 data is a picture of virtual stability, with variation of only +0.3%.
In summary, the most recent signs do not point to a robust expansion in the coming months. The results of Q2'23, as we have seen, were weaker for three of the four industrial macro-sectors. In addition, 76% of manufacturing branches presented, in Jun'23, larger than planned inventories, not stimulating production. And, according to FGV and CNI indicators, assessments of current business conditions were in the region of pessimism at the end of June.