In the last month of 2023, industry and retail trade showed contrasting results, while services continued their phase of moderation. The IBGE's monthly surveys point to a 1.1% increase in industrial output and a 1.1% drop in real sales of broad retail, which includes vehicles, auto parts, construction material and wholesale-retail. Services revenue varied +0.3%, versus the previous month, with seasonal adjustment.

Thus, the Central Bank's IBC-Br indicator, which acts as a proxy for GDP, showed an expansion of +0.82% from Nov'23 to Dec'23, after correcting for seasonal effects. It was the most robust increase of the second half of the year in this comparison.

Despite the greater dynamism at the end of the year, the first half was the main responsible for the positive result in 2023 as a whole. Also according to the IBC-Br, the country's economic activity expanded 3.6% in Jan–Jun'23 and 1.4% in Jul–Dec'23, compared to the same period of the previous year. In Q4'23, the figure was +1.8%.

This accommodation was driven by two important factors. Firstly, the direct and indirect impacts of the super harvest of grains at the beginning of the year, which dissipated in the following months and, secondly, the deceleration of the service sector, with the recovery of its bases of comparison and higher expenditures due to pandemic-related pent-up demand.

Of the major economic sectors analyzed in this Letter IEDI, services were the only one to lose dynamism, from +4.7% in Jan–Jun'23 to +0.2% in Jul–Dec'23. Retail showed important resilience, with +2.1% and +2.6%, respectively, but not without the help of a countercyclical measure that reduced federal taxes on vehicle purchases. The pace of growth of this retail branch's sales doubled from the 1st half'23 (+5.4%) to the 2nd half'23 (+10.7%).

With regard to the industry, the second half of 2023 brought a change in sign, even though the expansion was very limited. In Jan–Jun'23, the physical production of the sector registered -0.3%, rising to +0.5% in Jul–Dec'23, always in relation to the same period of the previous year. This, however, was due to extractive activities only (+5.8% and +8.2%, respectively).

Manufacturing, which represents the longest and most diversified production chains, with the greatest capacity to spread dynamism to the rest of the production system and which also consists of the most technology-intensive portion of the sector, continued to lose output throughout the year, albeit with some moderation: -1.3% in Jan–Jun'23 and -0.8% in Jul–Dec'23.

Regionally, manufacturing's struggle to grow was reflected in poor performances of the largest and most complete industrial parks in the country, while those specialized in extractive activities or in the processing of agricultural products came out ahead in 2023, such as Pará, Espírito Santo, Goiás, Rio de Janeiro and Mato Grosso.

The industry as a whole in São Paulo fell 1.5% in Jan–Dec'23, in Rio Grande do Sul it registered -4.7% and in the Northeast region as a whole, -3.5%. In the last quarter of 2023, there was some improvement, but it was not enough to help São Paulo's industry to return to the black. In this sense, the state was an exception, since the share of regional parks in the black in Q4'23 reached almost 78%, a much better figure than seen in Jan–Dec'23 (64%).

With these restrictions, the industry was merely flat in 2023, falling far short of the results of retail trade and services. In Jan–Dec'23, output of the general industry varied +0.2%, while sales of broad retail and services registered +2.4% and +2.3%, respectively.

For 2024, the impact of the reduction of the Selic base interest rate on loan rates to final borrowers opens the possibility of a better performance in markets for durable goods, which favors many segments of both retail and the industry. Services, as we emphasized, are already following a path of deceleration.

Other factors also play in favor of a higher economic dynamism for Brazil, such as the reduction of unemployment and inflation, as well as government income transfer programs and PAC. Externally, expectations of a continuation in the pace of growth of global GDP are also good news.

In addition, the regulation of the tax reform and the implementation of the new industrial policy, despite their more long-term nature, may have more immediate positive impacts as they reinforce the confidence of economic agents.

The latest projections captured by the Focus Bulletin point to an expansion in Brazil's GDP of 1.75% in 2024, with an acceleration in total industry's GDP to 1.7% and a deceleration in the other sectors. The IMF outlook update of Jan'24, in turn, added 0.2 percentage point to the estimate of Brazilian GDP growth in 2024, reaching 1.7%.

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