Analysis: How different sectors of Brazil’s economy should recover in coming months

RIO DE JANEIRO, BRAZIL – After a positive first semester for the Brazilian economy, more progress is expected with vaccination ramping up and a favorable external scenario.

Although figures are still incomplete, the first half of 2021 was considered surprisingly positive for Brazil’s economic recovery, despite the many challenges to overcome the coronavirus pandemic.

The second half of the year is expected to maintain this recovery with an acceleration in vaccination, still slow in pace, and the country should also be driven by the international economy’s improvement, boosting commodities.

The latest economic data, especially the first quarter numbers – up 1.2% compared to the last three months of 2020 – led several banks to upgrade their economic projections to 5.5% for 2021.

The economy’s resilience was supported by low real interest rates, ample credit supply, high levels of savings, recovery of formal employment, strong global growth, and adaptation to restrictive measures.

As emphasized by Bradesco’s economists, although industry, retail and services are still subject to health restrictions, the figures for these sectors have proven to be better than expected. The recovery, despite the social distancing measures still in place, has also occurred more rapidly. The projection of the bank’s economists is for 5.2% growth in Brazil’s GDP this year.

The opening of the economy, with the progress of vaccination, is expected to favor the service sector in particular, but agriculture will continue to stand out in 2021, according to the team.

Bradesco economists say that the global balance between supply and demand in agriculture is still very tight, keeping prices high and margins positive.

In turn, cattle breeding is still under great pressure from feed costs. The drought should reduce the level of feedlots in this off-season, increasing the supply (higher slaughter) of fat cattle in the short term and generating less pressure on prices. However, the relief should be temporary, since the number of animals slaughtered at the end of the year tends to be lower, leading to new price hikes.

As for industry, it reported a shortage of inputs and low stocks as limiting growth. The level of inventories is still below the standard, both in industry and retail, and some businesses have announced a shutdown due to lack of inputs.

The intermediate goods industry tends to continue to benefit, driven by demand and restocking. The production of wood, metallurgical products, cellulose, chemicals, rubber, and plastics remains at high levels. These sectors’ stocks are low. Moreover, domestic demand remains positive, economists point out.

In terms of construction, the performance has been positive, but the rise in costs is a point of attention. The demand for residential real estate remains heated, after the sharp inventory drop in 2020. In infrastructure, the resumption of government tenders shows a positive scenario for the future, economists point out.

In 2021 the federal government has granted concessions for 29 projects, including 22 airports, 5 ports, a highway, and a railroad. The list for the year is still large and some delays may occur. “Even if part of the auctions are deferred to 2022, 2021 will be marked by the resumption of infrastructure concessions, with long-term economic effects,” they say.

In retail, demand remains particularly favorable for durable goods and building materials. “Vehicles, furniture, electronics and building materials are still benefited by low interest rates and the resumption of employment, in addition to the accumulation of savings last year. The performance is only not better due to a shortage of inputs, something that the industry has been pointing out in recent surveys and which has delayed delivery times.”

Food inflation and the cutback in government programs are now affecting sales in supermarkets, as well as the gradual reopening of restaurants. Sales of semi-durable goods continue to lag behind in the cycle, but tend to accelerate with the economy’s reopening. In this segment are clothing, footwear and fuel. If there are no setbacks in immunization or additional complications from the pandemic, the prospects for the sector will be encouraging, Bradesco points out.

In the services sector, the reopening is expected to boost the segments focused on families and transportation, emphasizing recovery projections when comparing to other countries with a more advanced vaccination process, such as the United Kingdom and Israel, although the recovery will be different depending on the segment.

The sector’s recovery continues to lag behind others in Brazil because of the poor performance of the household services line, since social distancing measures still hinder the full use of these services, notably lodging and catering. This should also be mitigated as the vaccination process continues in the country and the economy reopens.

Information technology services are the positive highlight so far, while storage and logistics services are also being favored, with greater demand from e-commerce, although transport services are weakened because of aviation.