Letter IEDI n. 906–2018 slow and discontinuous recovery
2018 could have been the year of recovery consolidation. It was not. Exceptional factors partially contributed to last year's frustrating trajectory, such as the truckers' strike in May, the October elections, and Argentina's crisis in recent months, by disrupting the normal flow of goods, increasing uncertainty, and restricting exports of manufactured goods.
It must also be recognized that, in addition to these factors, there is not an engine of economic growth in operation to boost industrial activity. That is, important systemic barriers remain, preventing industrial recovery from taking off. This is the case of, for example, high unemployment, still-unsettled financing conditions, frozen public investments, insufficient infrastructure investment and the long-standing problems of (low) domestic production competitiveness.
The result was a variation of only +1.1% of industrial production in 2018, that is, less than half the rate of 2017 (+2.5%). The picture in the last months of the year was even worse than suggested by the annual figure. In Q4/18, the industry returned to the red: -1.1% compared to the same period of the previous year, having advanced +5% in Q4/17. Worse, this involution was not restricted to a few industrial branches.
As indicated by the IBGE, half of the 26 branches identified in its survey were in negative ground in 2018, a proportion two times higher than that registered in 2017 (7 segments). The IEDI examination of 93 industrial segments, based on more disaggregated IBGE data, also shows a profusion of negative signals.
Of these 93 segments, 43 registered a decline last year, or 46% of the total. Another 50 were able to grow (54% of the total). In 2017, there were 58 segments in the black and 35 in the red. That is, the proportion of those falling advanced 23% and the share of segments growing fell by 14%, indicating that more industrial sectors had difficulty to continue to leave the crisis behind.
The situation is exacerbated by the fact that, although slightly more than half the segments have grown, they have not freed themselves from the slowdown. Of the 93 segments, 53 registered a weaker result than in the previous year, or 57% of the total. This proportion is more than triple that of 2017.
Thus, virtually all industrial macro-sectors have found it difficult to keep their level of activity. The movement was strong in consumer durables, with growth going from +13.2% in 2017 to +7.6% in 2018, and in intermediate goods, from +1.7% to only +0.4%, respectively. For semi-durable and non-durable consumer goods, the implications were more damaging: they went from +0.8% in 2017 to -0.3% in 2018. The only exception was capital goods, up +6.2% in 2017 and +7.4% in 2018, although the loss of momentum in Q4/18 was notable (+3.4%).
Geographically, industrial weakening was also widespread: 10 out of the 15 areas identified by the IBGE did worse in 2018 than in 2017, although the majority (11) managed to grow in the year as a whole. In 2017, the balance had been better: 13 locations on the rise and all growing faster than in 2016. Were this all not enough, the fourth quarter of 2018 was negative for half of the regional parks, reaching 7 of the 15 areas.
Despite this high amplitude, what is most worrisome is that São Paulo, which has the most diversified and modern park in the country, is one of the leaders of the process, with two consecutive quarters of drops that deepened rapidly, going from -1% in Q3/18 to -3.7% in Q4/18. In the year, the state’s industry only avoided negative terrain thanks to the first months of the year and, nevertheless, came very close to stagnation: only +0.8% compared to 2017.
It is true that a great part of the difficulties of São Paulo’s industry is due to the food sector, especially the sugar-alcohol industry, due to unfavorable climatic factors and businesses' financial problems, but its worsening is more widespread than this: 61% of the branches present in the state lost momentum and 44% registered fall in 2018, including clothing, textiles, hygiene and cleaning, computer and electronics, food and more.
An additional comment: the results of 2017 and 2018 reflect only a cyclical improvement of industrial activity. A real change in this setting —with an effective reinvigoration of the industry, especially needed to meet the challenges of the new technological revolution— implies structural actions for productivity and competitiveness, such as tax reform, and the adoption of industrial policies both modern and adequate to the new times, much in line with the suggestions and reflections that the IEDI has been making and which were synthesized in the document "Industry and Brazil of the Future" (in Portuguese).