Economic activity slows down and affects industry, commerce and services

Interest at high levels. More restrained credit. Falling GDP growth expectations. The picture of the slowdown in economic activity is increasingly evident. But he hit the sectors differently. In services, the growth rate is still impressive, but the pace of expansion has been losing strength; in commerce, expectations are for another year of growth below 2%, a situation that has been repeated since 2018. In industry, segments more dependent on credit are suffering more than those linked to income or exportable.

The scenario for the Brazilian economy is not the most favorable: the midpoint of projections for GDP growth has been falling for two weeks, according to the BC’s Focus bulletin. It started the year at 0.8% and is now closer to 0.75%.

Expectations for the cut in interest rates this year have been diminishing. The Selic rate is currently at 13.75% and the signaling of banks, consultancies and brokerages for the end of the year is at 12.75%.

Hope can come from the other side of the world, says Nova Futura’s investment management director, Pedro Paulo Silveira. Expectations for growth in the Brazilian economy may improve if actual data from the Chinese economy exceeds expectations. Currently, the International Monetary Fund (IMF) projects a growth of 5.2% for China.

See, below, how the slowdown is occurring in the main segments of economic activity, in tax collection and in the job market.

Trade: interest and disposable income affect sales

The 1% growth in retail trade in sales volume last year and the fifth consecutive improvement in the growth rate in 12 months, which in July was -1.8%, do not encourage the sector. According to Itaú, the activity is still feeling the effects of the drop in disposable income and the lagged effect of the rise in interest rates. The financial institution points out that the slowdown was already expected.

Since 2018, the sector has not expanded at a rate greater than 2%, which according to the expectations of the National Confederation of Commerce in Goods, Services and Tourism should be repeated this year. Projections point to a smaller expansion this year: 0.6%.

The performance in December frustrated the sector. Sales were 2.6% lower compared to the previous month. “Given the frustrating result of December, after 11 months, the volume of retail sales is back below the level observed immediately before the outbreak of the covid-19 pandemic”, says economist Fabio Bentes, from the business entity.

The weaker performance should be reflected in more timid results for companies in the sector in this period, points out the retail analyst at Inter, Breno de Paula.

“In food retail, despite the stabilization of food inflation, prices are still high. The financial result remains under pressure, but net income and cash generation should reflect the period of strong seasonality (4th quarter of 2022). For clothing, the result must come once more under pressure. The quarter was affected by the low flow of people in malls during the World Cup period and by the colder than usual weather. Finally, ecommerce also suffered from the low flow of consumers during the World Cup.”

He also recalls that, despite the lines of credit having been controlled, they should reflect an increase in defaults. “The financial result should continue to erode the operating result”, he writes in a report.

The performance of commerce worsens if sales of construction material and vehicles, motorcycles, parts and pieces are included, which, together with retail, make up the expanded retail trade. According to the IBGE, sales volume fell by 0.6%.

The Brazilian Association of Construction Materials Industry (Abramat) points out that the loss of purchasing power of families in a context of persistent inflation caused them to postpone investments.

Vehicle sales to the domestic market reached 2.1 million tons in 2022, 0.7% below 2021, confirming a picture of stability projected by the National Association of Motor Vehicle Manufacturers (Anfavea) since the middle of last year.

Industry has fourth non-positive result in five months

One of the sectors most strongly feeling the effects of the slowdown in economic activity is industry. Industrial production in December was stable compared to the previous month, points out the Brazilian Institute of Geography and Statistics (IBGE). It is the fourth non-positive result in five months.

In the fourth quarter, performance was 0.5% lower than the previous quarter, 1.3% below the December 2021 level and 2.2% below the pre-pandemic level, points out XP Investimentos.

The broker assesses that the recovery of the mass of expanded real income available to families (increase in real income from work and greater government transfers) provides some support for spending on non-durable consumer goods. But other categories, such as consumer durables, suffer from tighter credit conditions and high consumer debt.

In the year, industrial production accumulates a decrease of 0.7% compared to 2021. But other indicators, from the National Confederation of Industry (CNI), point to some advances: real revenue (inflation already discounted) grew by 2. 8% last year; the level of employment increased by 1.5%; hours worked, 2.7%,

According to Larissa Nocko, an economist at the entity, the end of 2022 brings positive results, but not to be celebrated, since only in some cases was there a recovery of the losses suffered in the previous year. “There is also a perspective of stability for the year’s industrial production.”

Services: more moderate growth in 2023

The volume of services provided grew 8.3% last year, compared to 2021. Despite being a better number than other sectors of the economy, it has been showing a slowdown in the pace of expansion for three consecutive months.

Despite this scenario, the results were better than expected in December – the sector’s real revenue grew 3.1% compared to November, above the 1.3% expected by the market -, but, even so, there was a significant deceleration in the fourth trimester.

The trend is for growth in 2023, albeit at a more moderate pace. Itaú points out that the deceleration movement will continue throughout this year, motivated by lower disposable income and the greater impact of high interest rates.

Other factors that should also influence, according to XP Investimentos, are the dissipation of “post-pandemic” impulses and weaker demand from companies.

Labor market reflects slowdown in economic activity

The impacts of the slowdown in economic activity are also felt in the labor market, even with the unemployment rate having dropped to 8.1% in the moving quarter ended in November, according to the IBGE. In October, it was at 8.3%.

“The stability of the unemployment rate was due to the decline in employment (-0.7% in the monthly variation) being offset by a further drop in the participation rate (to 62%, from 62.4%)”, highlights the team for economic analysis at Itaú.

According to the financial institution, employment declined in both the formal and informal sectors. “This slowdown should continue ahead, as we expect GDP growth of 0.9% in 2023, driven mainly by the agricultural sector, but negatively affected by tighter monetary conditions and weaker economic performance”, point out the economists.

Collection shows loss of traction of economic activity

Another sign of the loss of traction in economic activity is tax collection. Despite the historical monthly record in December – BRL 210.2 billion, a real increase (already discounting inflation compared to the same month of 2021 -, it shows signs of a slowdown in economic activity.

According to economist Tiago Sbardelotto, from XP Investimentos, the December results continued to show a downward trend, mainly reflecting the tax cuts implemented throughout 2021 and the slowdown in economic activity.

“It is worrying that income-related taxes (IRPJ/CSLL) dropped in December compared to the same month in 2021, since these revenues were fundamental to the performance of collections last year”, he says. He points out that if this is confirmed as a trend, it will be necessary to review the revenue forecast.

In 2022, there was a record in federal collection, which reached BRL 2.22 billion, an increase of 8.2% in real terms compared to the previous year and a historic record. The main contributions, excluding social security revenues, were financial services, fuels, oil and gas extraction, machinery and equipment manufacturing and IT services.

According to Sbardelotto, financial services, fuels and oil and gas extraction accounted for 84% of the change in revenue last year. “Thus, a reversal of these activities, particularly in fuel prices, could have a strong negative effect on revenues.

Bradesco points out that the effects of the more restrictive monetary policy on economic activity will prevail and the impacts on revenue will challenge the fiscal balance.

The impacts will also be passed on to public accounts. Itaú recalls that the surplus result for 2022 – a primary surplus of BRL 126 billion or 1.3% of GDP – and the fall in public debt – from 78.3% of GDP, in 2021, to 73.5% of GDP , in 2022 – were due to temporary factors or factors that will be present to a lesser extent this year, such as a high amount of extraordinary income, high growth and inflation, in addition to good commodity prices.

“The implementation of the Transition PEC implies a significant increase in public spending in 2023, confirming the prospect of a return to a trajectory of rising public debt. Such a scenario, in the absence of corrective actions, could lead to a cycle of low growth, inflation and high interest rates”, warns the financial institution.