Letter IEDI n. 926–Industry: at the core of 2019 economic setbacks
Given the absence of engines of growth, the Brazilian economy lost a bit more of the meager dynamism it had been presenting. From the data already available, GDP may, at best, stagnate in the first quarter of 2019. But there's a good chance it will be negative.
We already knew the recovery would be slow, but are now seeing that it may also be discontinuous. For the first quarter of the year, the central bank's IBC-Br indicator, which acts as a proxy for GDP, shows a variation of only + 0.2% compared to Q1/18 and a drop of -0.7% versus Q4/18, with seasonal adjustment.
According to the Focus/BCB Bulletin, in just over five months GDP growth expectations for 2019 as a whole have already lost more than 1 percentage point, falling from +2.5% in early January to +1.45 in mid-May. For now, nothing suggests a reversal of this movement of successive cuts in projections.
Thus, since the level of economic activity gains neither strength nor consistency, we run the serious risk of another year with GDP close to 1%, the same rate seen since 2017. If this happens, we will be leaving aside a scenario of recovery to enter into another one of very low dynamism or semi-stagnation, given the depth and extent of the recent crisis.
The industry has been the pivot of the deterioration in recent months. In relation to the same period of the previous year, its output shrank in the last quarter of 2018 (-1.2%) and in the first quarter of 2019 (-2.2%). The Brumadinho dam disaster contributed to this situation, but is not the root cause of the worsening. Considering only the manufacturing industry, the picture remains negative in both quarters (-1.9% and -1.4%, respectively).
The crisis in Argentina has been another damaging factor for the industry, but does not explain what has happened either. A sign of this is that production losses are much more widespread, affecting branches of very different characters. Of the 26 industrial branches identified by the IBGE, no less than 20 —that is, 77%— were in the red in Q1/19. Worse yet, half the branches (13) fell in Q4/18, too.
That is, the contraction is too broad to be explained by one-off factors. The negative rates were also regionally spread, reaching 10 of the 15 industrial parks monitored by the IBGE, i.e., 2/3 of them. The most worrisome case is São Paulo, which has already seen three consecutive quarters of falls, which reached 72% of its industries in Jan-Mar/19. The only exception in this context of widespread decline is the Southern Region.
As the industry establishes strong demand relationships with other economic activities, its dynamism (or lack of it) promotes growth (or decline) in other sectors. This happens in relation to agriculture and livestock, but also to services, as indicated by the figures for Q1/19.
Services real revenues remained positive, despite a pronounced decline in March (-2.3% versus Mar/18), but kept growing very little, as has been the pattern since the middle of last year: +1.1% compared to the same period of the previous year. The segments that more closely reflect the dynamism of the country's economic and industrial activity experienced falls: transport, its auxiliaries and mail (-1.6%) and professional, administrative and complementary services.
The ones to register positive contributions to the performance of services were segments connected to household demand. This is clearly the case of services provided to households, but also of other segments that are part of private consumption, such as information and communication services and other services.
However, household consumption dynamism is not without important limitations, as over 13 million people are unemployed in the country. The situation could be different if the industry, which generates jobs of higher quality and higher income, were still at the far front of job creation, as happened in late 2017 and early 2018.
An indication of these limitations to the expansion of consumption is the behavior of retail trade in 2019. Between January and March, retail real sales were virtually stagnant (+0.3% versus Q1/18) and, with the inclusion of the automotive, auto parts and construction materials sectors ("broad retail"), dynamism fell to half that of late 2018: from +4.4% in Q4/18 to +2.3%.
The slowdown in trade has been driven, for the most part, by segments more dependent on household income such as: supermarkets, food, beverages and tobacco; fuels and fabrics; clothing and footwear. But the picture of the more credit-driven segments has not been much more promising.
There was a drop in sales of furniture and appliances (-1.9% in relation to Q1/18) and a strong decline in the growth rates for vehicles and auto parts (+8.4% in Q1/19 vs. 13.3% in Q4/18) and other personal and household items (+4.1 % vs. 8.5%), which include department stores.