Brazilian industry signals pessimism for this year

Manufacturing data for the first month of the year points to further economic deterioration in Brazil. According to the Brazilian Institute of Geography and Statistics (IBGE), industrial output fell in eight out of 15 locations surveyed in January, compared to December.  

The largest declines of 3.4 percent and 3 .1 percent were recorded in the states of Rio Grande do Sul and São Paulo, respectively. The results for São Paulo, Brazil’s economic powerhouse, were affected by the oil derivatives and vehicle sectors, according to IBGE analyst Bernardo Almeida.

The seasonality of January is not positive, Mr. Almeida points out, as the auto industry usually takes collective vacations in January, which reduces industrial production. But the sensitive point of the survey was the deterioration in the quality of industrial output, according to Étore Sanches, chief economist at Ativa Investimentos.

For Mr. Sanches, the slowdown in the production of capital goods made January’s data qualitatively worse than December’s, given the segment’s robust 4.2 percent decline. 

Capital goods, such as engines or machinery, are used to make other goods, making them important economic thermometers. Investment in durable goods signals the industry’s confidence to invest in the production of consumer goods such as clothing or food, which can be translated as confidence in future consumption. Likewise, a decline in the production of durable goods indicates a lack of confidence in the population’s ability to consume in the medium and long term.

“The production of capital goods is a good proxy for future growth,” Mr. Sanches concludes. 

Industrial production is unlikely to rebound in the short term, given that automakers recently halted production and sent assembly line workers on vacation amid falling sales. Brazilians are buying fewer cars due to a mix of a slowing economy, stubborn inflation, high interest rates, and already worrying levels of household debt. 

Despite the increase in the production of consumer goods, the slowdown in the production of intermediate goods — which consist of inputs for the manufacture of final products, such as flour or copper — also compounds the pessimism about economic activity in Brazil, according to Ulisses Ruiz Gamboa, a professor at the São Paulo-based business school Insper.

“The outlook for productive investment in the country is bad and it looks like it will be a lean year for manufacturing,” Mr. Gamboa concludes.

In addition, he cites high interest rates as an important factor in the slowdown in industrial production — in addition to causes seen throughout last year, such as the low demand for capital goods and the lack of inputs for equipment, especially semiconductors.

It is worth remembering that the increase in credit due to high interest rates makes it difficult for the population to consume, especially higher value-added products, and makes it more expensive for entrepreneurs to invest in production — expenditures that are usually made through installments or loans.

“Current inflation in Brazil remains under pressure and above the target, which prevents the reduction of the basic interest rate in the country. The movement has great potential to punish economic activity in 2023,” says Mr. Gamboa.

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