Letter IEDI n. 1220—Economic dynamism in the first half of 2023
Despite a strong asymmetry between sectors, the performance of the Brazilian economy surprised positively in the first half of 2023, raising GDP growth expectations for the year as a whole. High interest rates, however, continued to constrain activities more dependent on credit; therefore, the recent reduction in the Selic rate by the Central Bank is very welcome.
The projections for the country's GDP, which had started the year below 1%, according to the Focus Bulletin, advanced to 1.6% at the beginning of Jun'23, and then to 2.3% in mid-Aug'23. The IMF's last scenario, released in Jul'23, estimated growth of 2.1% for Brazilian GDP, one of the largest upward revisions compared to the outlook of Apr'23.
Much of this positive movement comes from the stronger than expected advance of agriculture in Q1'23, which also contributed to boosting part of services, as discussed in the IEDI Analysis of June 1st, 2023. The domestic market, in turn, barely moved, greatly harming the result of the industry.
According to the sector's real revenue data released by the IBGE, services showed resilience throughout Jan–Jun'23 and continued to grow more than industry and retail trade. Its lower dependence on credit together with job recovery have helped a lot. Still, there was some accommodation, after the pent-up demand (created by the pandemic) was met.
The increase in services was of 4.7% in the 1st half'23 compared to the same period of the previous year, supported by the growth of information and communication services (+5.3%), transport (+5.6%) and those provided to households (+5.8%). All five branches monitored by the IBGE decelerated in Q2'23, with emphasis on other services (financial and real estate, among others), whose revenue decreased by 0.5%.
Economic policy actions have also helped to heat up some activity in this first half of the year. This is the case, for example, of the reduction of taxes for the acquisition of vehicles, which in Jun'23 led to a 17.9% rise in sales of these goods compared to Jun'22. This was a major factor for real sales of broad retail to register an expansion of 4.0% in Jan–Jun'23.
In its narrow concept—that is, excluding sales of vehicles, auto parts, construction material and wholesale-retail ("atacarejo") —the performance of retail trade was much more modest: +1.3% in the first half of 2023. It is worth noting that in Q2'23, the sector was virtually flat, registering a variation of only +0.2% compared to Q2'22.
The result of retail in Q2'23 was constrained by segments whose markets require financing, to a greater or lesser extent. Sales of furniture and household appliances registered -0.3% in the period and those of construction material shrank 4.0%. The declines were most intense in apparel and footwear (-12.2%) and other personal and household items (-16.8%), which include department store sales.
The industry, as has been the rule, was the sector that did the worst in the first half of the year. Industrial production declined 0.3%, reversing the small expansion of the 2nd half 2022 (+0.4%). The overall picture is one of industrial stagnation. The biggest obstacle was capital goods, whose production fell 9.7% in Jan–Jun'23, harmed by the high interest rates practiced in the country.
In Q2'23, the performance of capital goods was even more negative: -12.4% in relation to Q2'22. Since the second half of 2020, the worst year of the COVID-19 pandemic, production of capital goods had not shown a double-digit negative growth rate. Machinery and equipment for the industry itself have already fallen 7 quarters in a row, giving a bad indication for the sector's investment.
The rescue of BNDES' strategic role in financing the modernization of our productive structure has been good news, but a stronger expansion of its activities still faces the cost of operations in a general high-interest environment in the country, limiting the level of activity of the capital goods industry.
Among the regional industrial parks, negative rates in Jan–Jun'23 were a minority (44%), marking 8 of the 18 locations monitored, but reached important parks, such as São Paulo (-1.9%) and Rio Grande do Sul (-6.0%), as well as the Northeast (-4.5%). Considering only Q2'23, poor results marked the same number of parks, suggesting that there has not been much progress over the period in question, although there are cases of relative improvement.
Despite the drop in the industry, the resilience of services and a more robust growth in broad retail, with the help of the exemption from vehicle taxes, led the Central Bank's IBC-Br indicator, which acts as a proxy for GDP, to register an expansion of 2.65% in Q2'23 compared to the same period of the previous year. It is a positive pace, but much lower than in Q1'23 (+4.22%).