Letter IEDI n. 1253—Industry: eight mitigating factors of January's fall
At first glance, 2024 started worse than 2023 for Brazilian industry, registering the most intense drop since Apr'21, in the seasonally adjusted series. Although there is no denying the negative result of Jan'24, there are important mitigating factors that ended up being overshadowed by the aggregate performance.
IBGE data recorded a decrease of 1.6% in Jan'24 compared to the previous month, discounting seasonal effects. As a result, the 1.6% increase of Dec'23 was canceled out —the rate was revised upwards in this latest release, from 1.1% in the previous edition of the survey.
Much of this, however, was concentrated in the extractive sector, whose production fell 6.3% after two consecutive months of expansion (+3.4% in Nov'23 and +3.2% in Dec'23). It is worth remembering that this portion of the industry did very well in 2023, with an expansion of 7% compared to only +0.2% for the industry as a whole.
But this was not the sole aspect to mitigate the drop of Jan'24. A closer reading points to at least eight other factors:
First, the number of branches with no growth early in the year was both a minority and also lower in comparison to the end of 2023. Of the 25 branches monitored, 8 were stable or lost output in Jan'24, against 11 branches in Dec'23. This is equivalent to 32% versus 44%, respectively.
Secondly, the branches that achieved an increase in production in Jan'24 represented 68% of the total; of these, a majority fraction (82%) did better than in Dec'23, always considering the seasonally adjusted data, which indicate the most short-term trend.
Third, the macro-sectors that accumulated more adverse months throughout 2023 managed to raise output at the beginning of this year. This was notably the case of capital goods (+5.2%), but also durable consumer goods (+1.4%).
Fourth, from a regional perspective, the number of industrial parks in the red in Jan'24 was a minority, too: six of the fifteen locations monitored by the IBGE or 40% of the total.
Fifth, São Paulo's industry, which is the largest and most diversified industrial park in the country, did not follow the national aggregate and registered growth of +0.8%, above the pre-pandemic level (+0.4% compared to Feb'20).
Sixth, in the year-on-year comparison —that is, in relation to the same period of the previous year— not only the general industry but also all its macro-sectors grew. Although a modest basis of comparison helped, the 3.6% increase of the industry as a whole was the highest since Jun'21 (+12.1%), when the sector was still responding to the negative effects of the COVID-19 pandemic of the previous year.
Seventh, inventories were considered excessive by a minority of manufacturing branches: 32%, according to a CNI survey. That is, for most of the sector high inventories will not be an obstacle to increasing production in the following months.
Eighth, the confidence indicators of manufacturing entrepreneurs were stable from Jan'24 to Feb'24, according to FGV and CNI. In addition, Brazil's PMI Manufacturing, another high-frequency indicator used to assess the sector's dynamism, rose from 52.8 points in Jan'24 to 54.1 points in Feb'24, indicating an improvement in the business situation.
These favorable indications at the beginning of 2024 do not mean that the industry will not go through moments of volatility, nor that an upward path is guaranteed. They only mitigate the decline of the sector aggregate.
Despite this, 2024 has much to be a more positive year for the industry. This is because the fall in the base interest rate (Selic) should be more clearly felt in lending rates to final borrowers, creating a less adverse environment for investment.
As discussed in the Analysis of March 1st “GDP 2023: more external sector, less investment” [in Portuguese], gross fixed capital formation, manufacturing and construction were the GDP components that fared the worst in 2023.
Economic policy actions, such as the PAC, the Accelerated Depreciation, the More Production Plan, among others, if well implemented, tend to have dynamic effects on the country's industrial output. The "New Brazilian Industry" program, in turn, has the power to promote productive improvements, through support for digitalization and productivity, decarbonization and value addition.