Letter IEDI n. 874–Widespread deceleration, especially in the high technology industry
Industrial recovery has been losing momentum since early 2018. Although still positive, the growth rate of physical production declined quarter after quarter from the beginning of the year in relation to the same period in 2017. As a consequence, we moved from a satisfactory dynamism of +4.9% in Oct-Dec/17 to only +1.7% in the second quarter (Q2) of this year. The deceleration was even more intense in manufacturing: from +5.8% to +1.7%, respectively.
This is a disappointing trajectory for the sector, which has yet much to recover from the heavy losses of 2014-2016. It should be noted that, at the end of the first half of 2017, industrial output was about 14% below its historical peak of March 2011. The gap in capital goods and durable consumer goods, in turn, is much higher than this level. In other words, given the rapid technological advance the world industry has been going through, there is no time to lose in restoring the dynamism of Brazilian industry.
The study summarized in this Letter IEDI presents an overview of the industrial evolution according to the technological intensity of its different branches. Its based on the methodology developed by the OECD, which groups the manufacturing industry into four distinct categories: high, medium-high, medium-low and low technological intensity. As we will see below, the results worsened in three of the four bands, with the only exception not bringing any encouragement.
The industry of high technological intensity had the worst performance. It had recovered its growth pace and was gaining speed, reaching +13.1% in Q1 2018 compared to the same period of the previous year; but in the second quarter of the year it registered a -5.8% fall. This was the worst quarterly result among the four categories. All of its components deteriorated, especially pharmaceuticals (+8.4% in Q1/18 and -0.6% in Q2/18). Radio, TV and communication equipment, which grew to double digits since the end of 2016 (reaching its best mark in Q1/18, +31.6%), cooled to +9.4%. The only exception was office and IT equipment, which kept the same growth dynamism (+24.1% in Q2/18).
Another range once more entering negative territory was the low technology intensity industry. Its 2.3% drop in Q2/18 represented the most dramatic stage of a clear and continuous deceleration that started in Q4/17. In this case, not only the loss of dynamism was widespread among its branches, but also most of them remained in the red in Apr-Jun/18 —notably textiles, leather and footwear, which registered the worst result: -5.1% against the same period of the previous year. The only branch to preserve the positive sign was wood and its products, paper and pulp, with +1%, well below the same period of 2017 (+7.1%).
Meanwhile, the industry of medium-high technological intensity avoided the fall, but it still did not go very well. Its growth rate, which reached +11.3% in Oct-Dec/17, declined to +8.4% in Jan-Mar/18 and finally to +2.8% in Apr-Jun/18. Vehicles, trailers and semi-trailers, the most dynamic branch of this band for a while, continued to grow at a strong pace in Q2/18 (+16.3%), but it has had better days. Mechanical machinery and equipment also suffered a sharp deceleration (from +7.1% to +1.7% from the 1st to the 2nd quarter/18). Electrical machines and equipment and chemical products (except pharmaceuticals), on the other hand, which were already doing poorly, worsened further: -1.1% and -3.1%, respectively, in Q2.
Finally, the only band to register some improvement: the medium-low technological intensity industry. In this case, the stability (0%) registered in the first three months of 2018 gave rise to a 2.8% growth rate in the following quarter. Two caveats are worth making regarding this performance. First, despite the acceleration, the pace of Q2/18 was below that of Q4/17 (+3.8%). Second, only one branch was responsible for the improvement: refined petroleum products and other fuels, which turned a -5.9% fall into a +7% rise from the first to the second quarter of the year. All other branches lost dynamism, with nonmetallic minerals seeing their fall deepen (-1.6% in Q2/18).