Car prices have the biggest drop in 11 years after discounts – 07/24/2023 – Market

Under the impact of the Luiz Inácio Lula da Silva (PT) government’s discount program, new car prices fell 2.76% in June, the biggest reduction in 11 years in Brazil.

This is what the data from the IPCA (National Index of Consumer Prices) released by the IBGE (Brazilian Institute of Geography and Statistics) last week point out.

The fall for the consumer, however, should be short-lived, since the discount program for the so-called popular cars was punctual, say analysts. The government announced the end of the measure earlier this month.

“Prices are now back to normal. The consumer is again faced with higher values”, says Milad Kalume Neto, director of business development at consultancy Jato Dynamics do Brasil.

According to the IBGE, with a drop of 2.76%, new cars had the greatest individual contribution (-0.09 percentage points) to the (low) deflation of 0.08% of the IPCA as a whole in June.

However, with the end of discounts, zero-kilometer cars should rise 0.7% in the July inflation index, projects economist André Braz, from FGV Ibre (Brazilian Institute of Economics of the Getulio Vargas Foundation).

For the IPCA as a whole, the estimate is for an advance of 0.15% this month, according to Braz.

“The federal government’s measure has no lasting effect. Just as it opened space for a truce in June, it may accelerate inflation in July. Now, prices are rising again”, points out the economist.

The 2.76% drop was the biggest for new cars in the IPCA since June 2012. At the time, the retraction in prices had reached 5.48%, also under the impact of a federal government measure to stimulate consumption.

At that time, cars became cheaper due to a reduction in the IPI (Tax on Industrialized Products) announced by the Dilma Rousseff (PT) administration.

High interest brakes sector

After the effect of the Lula government’s discount program, the production and sale of cars tend to find a scenario of obstacles in Brazil, according to analysts.

Kalume Neto claims that the sector is feeling the effects of high interest rates and restrictions on granting credit. “The government’s program moved the sector, it avoided more factory stoppages, but it is momentary”, he says.

“We have the glass half full and half empty. Interest rates are still high, as well as vehicle prices. All this is preventing consumers from buying a car,” he adds.

Braz goes along the same lines. According to the economist, the BC (Central Bank) tends to cut the basic interest rate (Selic) in August, but the reduction should not generate major effects “from one moment to another” in the automotive sector. The Selic is at 13.75% per annum.

“If the Selic falls by 0.25 percentage points, the interest on automotive financing will not change much. What will count is the accumulation of cuts over time”, says Braz.

“You will only buy durable goods, such as a car and an apartment, when interest rates allow payments to enter the budget,” he adds.

In June, the prices of new cars fell in the 16 capitals and metropolitan areas surveyed by the IPCA. Fortaleza recorded the highest deflation (-5.08%).

Rio Branco (-4.94%), Aracaju (-4.17%), Goiânia (-4.15%) and Rio de Janeiro (-3.80%) came next. São Paulo had a drop of 2.51%. The smallest decrease occurred in Curitiba (-1.40%).

The Lula government’s discount program for cars worth up to R$120,000 came into effect at the beginning of June, lasting for one month. The breakup was confirmed on July 7.

The estimate of the MDIC (Ministry of Development, Industry, Commerce and Services) is that 125 thousand units were sold with discounts.

In addition to new cars, used cars also showed price reductions in the June IPCA. In this case, the drop was 0.93%, the biggest since July 2017, when the drop had also been 0.93%. New-car deflation may have weighed on used-car prices, analysts say.

The Covid-19 pandemic has disrupted global production chains, raising vehicle manufacturing costs. This led to transfers to the final prices of the cars.

In the accumulated of 12 months, new cars registered inflation (high) of 0.49% until June in Brazil, according to the IPCA. Already the prices of used fell 3.08% in the same period.