Ipea survey indicates that the crisis has lost steam

The Institute of Applied Economic Research (Ipea) launched, on 27/06, research carried out by its Conjuncture Group (Gecon) on the behavior of economic activity in Brazil. The recent performance of some economic activity indicators suggests that the crisis has started to lose steam. The first signs of this possible start of cyclical recovery have been concentrated in industry.
 
The adjustment coming from the external sector begins to generate positive effects, notably in the industrial sectors more focused on foreign trade, such as, for example, textiles, footwear and wood. In addition to the increase in competitiveness, it is also noted that the currency devaluation may be stimulating some import substitution, mainly in the production of intermediate goods.
 
In turn, the contraction in domestic demand continues to trigger a strong adjustment in inventories, which could represent another source of stimulus for the recovery of production. Reflecting, in part, this improvement in the scenario, business confidence levels have been rising in recent months – although they remain at levels very close to historic lows.
 
The industry's production performance is still volatile, even with positive results becoming more frequent. Despite this, after two consecutive increases, the Ipea industrial production indicator points to a drop of 1.6% in physical industrial production between April and May, in the comparison with seasonal adjustment, equivalent to a drop of 6.5% over the same period in 2015.
 
While the industrial sector shows signs of improvement, on the demand side, a slower recovery in the consumption of goods and services is expected, whose performance is strongly associated with the dynamics of the labor market. Furthermore, the continued drop in domestic demand generated a strong reduction in the level of capacity utilization in the industry, which could delay the recovery of investments.
 
Another negative factor for the growth in apparent consumption of capital goods is the devaluation of the real against the dollar, which makes the import of machinery and equipment more expensive. Even so, according to Ipea's own estimates, the good performance of civil construction indicators and apparent consumption of machinery and equipment in April indicates that investments had a good start to the second quarter, with an increase of 2.8% in April, in comparison with seasonal adjustment.