After seven years, all segments of industrial GDP will grow

Having risen almost nonstop in the second half of last year, confidence indicators began 2018 sustaining that trend. Nine commerce, manufacturing, construction and consumer indices released by different entities rose in relation to December and to January of 2017. Most still point to reduction in the pessimism, more than increase in the optimism, since they are below 50 or 100 points, levels that separate those two sentiments, depending on the methodology. And in some the sub-indicators of expectations fell because of the outlook of large political uncertainty that characterizes this election year.

Surveys released by Fundação Getulio Vargas (FGV), FecomercioSP, association of merchants in São Paulo, and the national confederations of industry (CNI) and commerce and services (CNC) came positive this month, especially with the improvement of evaluations of the current situation. “The numbers of the end of last year came in general very good and the first 2018 data reiterate the expectation of acceleration of the economy,” says Rodrigo Nishida, economist at LCA Consultores, citing the preliminary manufacturing confidence index of FGV and also the number of car registrations in the first half of January.

In the period, 7,855 passenger cars were registered per business day, up about 20% year-over-year, Mr. Nishida says. Such increase was expected because of the low basis of comparison, but shows that January is keeping with good numbers. Preliminary manufacturing confidence data, if confirmed in the final survey, will show in January the seventh straight increase.

Shipments of corrugated paperboard, a leading indicator, increased 6.8% year-over-year in the fourth quarter of 2017, according to the Brazilian Corrugated Board Association (ABPO). For the year, the trade group forecasts 4.6% growth over 2016. Last January, the expectation was of only 1% increase. For 2018, the projection is of 3.5% expansion over 2017. As of the first half, ABPO says, shipment growth was concentrated in agribusiness. Since the third quarter, there was more widespread growth among the several sectors, it says.

In the retail trade, inventories are better adjusted, giving way to more orders to manufacturers. According to the National Confederation of Commerce (CNC), the portion of merchants with above-expected inventories fell slightly from 27.9% in December to 27.5% in January. Such share has been falling every month and is converging to its historical average, of 24.8%.

FecomercioSP reported an improvement in the December inventory indicator from 103 points in January to 105.3 in January (the higher the better), after the good sales performance for Christmas. The proportion of businesses that consider their inventory level adequate reached 52.5%, the ninth month in a row above the 50% mark, but still short of the pre-crisis historical average, of 60%.

CNI’s industrial survey showed that only 8 out of 28 manufacturing segments – leather, footwear, textiles, furniture, non-metallic ores, machine and equipment – had higher than planned inventories in December 2017. The adjustment process started in 2016 continued through the year and led companies to finish the year with adequate inventories, the industrial confederation said. “Considering business expectations for the next six months, there is a significant improvement in demand, exports and input purchases, whose indicators were below the neutral level and surpass what was seen in the same period of the previous year. Such results reinforce our perception that the Brazilian economy will keep recovering in the next few months, albeit gradually,” Bradesco said about the CNI survey.

In the manufacturing industry, different segments have not yet released their full 2017 data and are still conducting individual surveys for January, but the expectations are positive in most of them. In the textile industry, companies are holding adequate inventories. After a drop in demand in October and November, there was an indication of recovery in December, says Fernando Pimentel, president of the Brazilian Textile Industry Association (ABIT). “The year will be positive for production and consumers.”

In capital goods, the trend is of improvement in 2018, says José Veloso, president of the Brazilian Association of the Machinery and Equipment Industry (Abimaq). “We begin the year with optimism,” he says. Coming from four years of contraction in the apparent consumption of machinery and equipment, companies will have to renovate their industrial facilities, something that is in part already happening. Sales, which fell 3% in 2017, are expected to grow 5% to 8% this year, Mr. Veloso says.

Some sectors are yet to see any significant improvement. Heitor Klein, president of the Brazilian Footwear Industry Association (Abicalçados), says 2017 was a difficult year and he has not seen any improvement yet. “In this beginning of year we haven’t noticed yet something that indicates notable recovery,” he says. He expects a weak first half. And unless this year’s winter is harsher than last year’s, when mild temperatures prevailed, the outlook is unlikely to change much. He says the decline in the unemployment rate and income gains have not had relevant impact on the sector, which according to preliminary data grew 2.3% in 2017. “This year, if we don’t contract, it will be good,” he says, explaining that traditionally in World Cup years other demands replace the purchase of footwear in consumers’ shopping lists. Mr. Klein cites the election as a factor of uncertainty over demand.

Viviane Seda, coordinator of FGV’s consumer survey, says the political landscape may have some impact on consumer spending. “We will have an election year with many doubts in the political field and this may be a factor of reduction, even if small, in expectations,” she says. Rodolpho Tobler, coordinator of the commerce survey at FGV, says the business mood may become more volatile for the same reason. The overall context, he says, should continue favorable to the sector.

Indeed, the expectation is that in the battered industrial activity all branches will perform better this year than in the last. In the last six years, at least one segment of the industrial GDP — manufacturing, extractive, construction and public-utility industrial services (SIUP) — ended down. In 2017, in the 12 months through the third quarter, even though extractive industry and SIUP performed well, manufacturing and especially civil construction were in negative territory, according to the Brazilian Institute of Geography and Statistics (IBGE). In 2018, all are expected to be in positive territory.

Estimates compiled by Valor Data show the industrial GDP is likely to grow 3.6% after three years of decline. Manufacturing is expected to grow 4.7%, benefiting from higher domestic demand and exports, even though exports are not expected to perform as well as in 2017.

The extractive industry is projected to grow 3.9%, with higher oil and ore production, while utility services are estimated to increase by 3.6%, with higher supply of electricity and because of the increase in economic activity. Finally, construction is expected to have a small growth of 2%, coming from four years of contraction.

Claudio Considera, researcher at the Brazilian Institute of Economics of Fundação Getulio Vargas (Ibre-FGV), says the industrial activity “certainly” will perform better than in 2017. Manufacturing will stand out, with “higher growth than the GDP.” He says the clearance of Workers’ Severance Fund (FGTS) money “pulled the trigger” and, since then, the recovery has been gaining steam. The low comparison basis also gives its contribution.

Lagging effects of the interest rate cut will be felt this year, benefiting credit and investments, Mr. Considera says. Durable consumer goods, such as cars and major appliances, are likely to perform better. Mr. Considera sees a positive trend in the modernization of factories. “Companies revamping worn-out machines and modernizing equipment,” he says. The main risk to the industrial rebound, he adds, is the political situation.

Rafael Cagnin, economist at the Institute of Studies on Industrial Development (Iedi), sees the definition of the political landscape as key factor for a more consistent performance of the industrial sectors. “The economic agenda that will come out of the elections is crucial for the formation of scenarios in the private sector. Until that gets defined, companies will take more timid decisions, which involve less spending,” he says.

He argues that much of the manufacturing improvement last year owed to exceptional factors, such as the clearance of FGTS money and the bumper crop. The big agricultural output, he says, also benefited the monetary policy by bringing down food prices and thus inflation. The drop of interest rates because of that helped consumers reduce their debts.

Another exceptional element, he says, was foreign trade, which affected the industrial chains through especially the automotive industry. “The automotive industry’s performance was fantastic, there was demand, but this also has to do with decisions of production allocation within the carmakers’ global chain,” he says. In Iedi’s calculations, the auto industry alone contributed half (1.2 percentage point) of the 2.3% increase in industrial output in the year.

Foreign trade and agricultural crop are likely to continue helping the industrial sectors in 2018, but less, Mr. Cagnin says. And the large idle capacity is still a hurdle. “If it doesn’t improve, you can’t expect a stronger rebound of investment,” he says.

Capital and durable goods are expected to have the best performances among segments, benefited by the drop of interest rates. Intermediate goods are also candidates to more positive numbers. Semi- and non-durable goods will depend on the continuity of job and income recovery.

The other two industrial sectors in the GDP are likely to perform well because of the increase in oil and ore production (extractive) and because of the favorable rainfall (SIUP). In the former case, there is expectation of higher production by Petrobras and other oil producers, as well as of ore by Vale. In the utilities, in which power is the largest segment, the recovering of manufacturing and activity tends to increase the demand, says Mr. Nishida, with LCA.

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