Industrial Production Disappoints; Recovery Will Not Be Smooth for Brazil in 2020

RIO DE JANEIRO, BRAZIL – November’s industrial production, released on Thursday, January 9th by the Brazilian Institute of Geography and Statistics (IBGE), was a real “bucket of cold water” for those who expected a steady – and relatively quiet – recovery of Brazilian economic activity in 2020.

Following three consecutive months of rebound, the industry halted its upward trajectory and saw a 1.2 percent decline in November compared to October, or a 1.7 percent drop in the annual comparison, surprising in a rather negative way the expected 0.7 percent drop in the monthly basis and 0.8 percent in the basis of comparison to 2018, according to a Bloomberg compilation of economists’ estimates.

The result led the sector to lose part of the 2.2 percent increase it accumulated over a three-month sequence of advances from August to October.

Of the 26 industrial sectors monitored by the statistics body, 16 fell in November compared to the previous month. The main negative influences were food products (-3.3 percent), motor vehicles, trailers and bodies (-4.4 percent) and extractive industries (-1.7 percent).

The reduction in automobile manufacturing led to a drop in the durable consumer goods category, while lower truck production put pressure on capital goods.

“The production of capital goods now records a decline in four of the last six months, which suggests a weaker investment dynamic,” points out Alberto Ramos, Goldman Sachs’ Latin American economist.

The abrupt decline in the Brazilian industry leads to a halt in optimism about the country’s economy. Economists consulted by Focus believe that the economy’s growth could double this year compared to 2019 by increasing over two percent (more precisely 2.3 percent, according to January 6th data), amid an environment of reforms favorable to the market and with the Central Bank reducing interest rates to record levels.

“The result of industrial production serves as a serious reminder that economic growth should accelerate, but the process is neither linear nor uniform,” said Adriana Lupita, economist for Latin America at Bloomberg Economics.

“Retail should perform better than the industry. While industrial production should benefit from lower rates, other factors such as the demand from trading partners, such as Argentina in crisis, in addition to renewed confidence and investment, may continue to weigh against it,” she said.

The estimates are also less positive for the month of December. The first industrial performance indicators show a mixed scenario, according to Capital Economics. “The numbers show that Brazil’s economic upturn remains weak”, highlights John Ashbourne, senior economist of emerging markets at the consultancy.

According to Bradesco BBI, despite the poor figure, this should not change the industrial production’s rebound trend but should show a more cautious view of economic activity.

“In fact, although the fourth quarter of 2019 was warmer due to the release of FGTS (Severance Premium Reserve Fund) resources and the continuity of a cyclical recovery operation, Brazil still has a historically high unemployment rate (11.2 percent in November). For the time being, we still believe that the industry should continue to improve gradually in the short term. In the long run, growth will require greater strength in the capital goods category, suggesting that investments will need to follow a more sustainable growth path,” the economists claim.

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