Industrial production drops 1.3% in July and returns to below pre-pandemic levels – 09/02/2021 – Market

Pressured by the scarcity of inputs and the increase in factory costs, Brazilian industrial production fell by 1.3% in July, compared to the immediately previous month, informed the IBGE (Brazilian Institute of Geography and Statistics) on Thursday ( two).

As a result, the indicator was once again below the pre-pandemic level. It is 2.1% lower than in February 2020. Compared to July last year, production grew 1.2%.

The numbers were below market estimates. Analysts consulted by Bloomberg agency projected a 0.8% decline compared to June. Compared to July 2020, the forecast was for growth of 1.9%.​

According to the IBGE, industrial production accumulated an increase of 11% in the first seven months of the year, influenced by the fragile base of comparison. In 12 months, there was an advance of 7%.

The fall in July was the fifth in 2021 and the second in a row. For the seventh month of the year, the 1.3% retraction is the biggest since 2015, when the low reached 1.9%. At the time, the national economy was undergoing a period of recession.

“At the beginning of the year [2021], there were closures and greater sanitary restrictions in certain locations, which affected the production process. With the advance of vaccination and the relaxation of restrictions, industrial production now feels the effects of higher cost and breakdown of the entire production chain”, explained André Macedo, manager of the IBGE survey, noting that, in January 2021, the indicator was 3.5% above the pre-pandemic level.

After being hampered by the arrival of Covid-19, in the first quarter of 2020, the sector experienced a reaction over the past year, in the wake of the reopening of activities and programs to stimulate the economy. This movement, however, lost steam in the first half of 2021.

The difficulty in obtaining raw materials affects segments such as the automotive sector, which foresees a consistent improvement in the picture only in 2022. The lack of components is associated by analysts with disarray in the production chains.

To complicate the situation, the scarcity of inputs has been accompanied by soaring prices. From January to July, inflation in industry, measured by the IPP (Producer Price Index), rose by 21.39%. The variation in seven months is already greater than that verified in the whole year of 2020 (19.38%), show data released by the IBGE on the last 27th.

The IPP measures price variation at the “factory entrance” without the effect of taxes and freight. That is, it captures the values ​​of goods used in manufacturing processes.

According to the IBGE, industrial production in July is equivalent to the level of January 2009. The 1.3% decrease compared to June had a widespread profile, reaching 19 of the 26 surveyed sectors.

The main negative influences came from beverages (-10.2%) and food products (-1.8%), says the institute. Other important negative contributions came from automotive vehicles, trailers and bodies (-2.8%), machinery and equipment (-4.0%), other transport equipment (-15.6%) and mining and quarrying (- 1.2%).

Macedo highlighted that the prolonged drought also affects segments of the industry. In this sense, he recalled that the adverse climate generated losses in the production of food such as sugar — the drought, combined with frost, impacted sugarcane crops in the Southeast.

The escalation of inflation and restrictions on consumer income represent additional difficulties for the recovery of factories, said Macedo.

“The effects of the pandemic are also seen in domestic demand. We have a large contingent of unemployed workers, more than 14 million, wages that do not advance and job insecurity with lower wage levels. All these factors are within the scope of the analysis”, he pointed out.

In the case of inflation, the price hike has been driven in recent months by the water crisis. In addition to putting pressure on food prices, the prolonged drought increases energy generation costs in the country. As a result, electricity bills rise in Brazilian factories and homes.

A recent survey by the CNI (National Confederation of Industry) raises a warning about the matter. According to the study, nine out of ten businessmen in the sector report concern about the lack of rain.

The data indicate that industrialists fear mainly the increase in energy costs (83%). Possible rationing (63%) and chance of power outages (61%) are also cited threats.

Of the 26 industrial sectors surveyed by the IBGE, 15 are below the pre-pandemic level of February 2020. The furthest away is the segment of motor vehicles, trailers and bodies. In July, production was 18.5% below the pre-crisis level.

The second furthest branch is the manufacture of clothing and accessories. The segment was at a 13% lower level.

On the other hand, 11 activities surpassed the pre-crisis. In this case, the highlight goes to machinery and equipment. In July, this branch was at a level 17.2% above February 2020. Next, comes the metallurgy activity (12.4%).

An analysis by Genial Investimentos concludes that “leading indicators are negative for the industrial sector” in August. The report cites, for example, that the manufacturing PMI (Purchasing Manager Index) was 53.6 last month, weaker than in July (56.7).

In a note, André Perfeito, chief economist at Necton Investimentos, highlighted that the drop in production at factories in the seventh month of the year came below market estimates.

According to Perfect, “the third quarter starts off on the wrong foot”, and the result of the factories, combined with the GDP (Gross Domestic Product), indicates “weakness” of economic activity.

IBGE released on Wednesday (1) the GDP for the second quarter. In comparison with the initial three months of 2021, the indicator retreated 0.1%. In calculating GDP, the industry had a negative variation of 0.2% in the same period.

Banco Fator’s report, signed by chief economist José Francisco de Lima Gonçalves, also highlighted that industrial production in July came in at a level worse than expected.

“The inter-annual effect of the low base of comparison will fade and the decisions to produce more based on expectations fall. The fall in the sector’s production in the third quarter is almost certain”, he projects.

“Income will certainly affect production in the coming quarters and the bottlenecks may be resolved at a lower level than the pre-pandemic,” he adds.