Recovery of Industry: Domestic Production and Imports
Brazil’s industrial output grew in September and is 2% above the level observed in December 2016, an average increase of 0.6% per year in the period. It was the fifth consecutive month of expansion, and unlike many countries, Brazil has already recouped the loss accrued in March and April. But is this growth sustainable? The strong increase in the consumption of goods explains a large part of the rebound of domestic industrial production, which is not surprising given the magnitude of the emergency relief program. However, sustained growth depends on productivity gains, and although advances have been achieved in recent years, such as the labor law reform and end of the TJLP, they have fallen short of significantly raising productivity. Even with those reforms, before the downward plunge provoked by the pandemic industry had not managed to recover from the recession of 2014-16. In this report, we show that besides the stimuli produced by the emergency relief program, there are clear signs that part of the increase in demand is being met by domestic production of goods that were previously imported. This is a movement largely beholden to a weaker real exchange rate, but not because it sufficiently stimulated exports, as happened in the food sector. Instead it opened room for domestic industrial production of goods that were formerly imported.
After shrinking by a cumulative 27% in March and April, industrial production advanced 37% between May and September, and now is slightly above the level in February (Graph 1). The recovery was generalized: the production of intermediate goods is already nearly 4% above the level of February, but the capital goods industry is still 5.5% below the pre-pandemic peak.
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