Having fallen by nearly 35% from its pre-crisis high (in August 2013), manufacturing output showed a rebound of 4.1% (YOY) in May. While this number appears impressive at first glance, B2B companies selling in Brazil should be aware of several details before presuming that demand for their products has returned to stay in the market.
The rebound in manufacturing output has largely been driven by the growth of durable consumer goods and capital goods production:
- Consumer durable goods output is up 20.6% YOY. However, with consumers still struggling to find jobs and sentiment still low, the rebound in consumer durable output is unlikely to remain robust over the short-term as demand for increasingly higher output will not be present in the domestic market. Rather, the recent upturn in output is more likely an initial adjustment in production from what was originally a very deep cut – even today output in this category remains a full 30.5% below its pre-crisis high
- Capital goods output is up 7.5% YOY, but with capacity utilization still well below historic levels, this increase is likely driven by companies replacing worn out equipment or investing in productivity enhancement (i.e. information technology) rather than signaling a sustainable increase in overall capacity to produce
Growth in consumer durable goods output has been led by the automotive sector, and is likely unsustainable in the short-term
- The increase in consumer durable goods output can largely be explained by a rebound in automotive output (27.8% YOY), which has been buoyed by the return of pent up demand from upper income consumers as well as higher exports. However, with the broader consumer base still struggling to find jobs, consumer sentiment still weak, and consumer interest rates and indebtedness remaining elevated, automotive manufacturers are unlikely to see a sustained rebound in demand over the short-term and thus are unlikely to sustain the current rate of growth in output
Growth in capital goods production has been driven by information technology companies and should continue expanding over the short-term
- The bulk of output growth in capital goods is focused on information technology goods (25.8% YOY) as companies across the economy look to increase productivity in the face of continued low demand growth and increased pricing pressures. FSG expects this trend to continue
Despite continued weakness in consumer non-durable output, there exists significant regional differences in demand
- While consumer non-durable production has yet to rebound, regional differences in consumer good spending growth has created divergences in performance between regional producers. States especially in the south and southeast – where consumers rely more heavily on formal service sector jobs and have higher savings – have shown the greatest strength in consumer spending in recent months
Companies continue to be constrained by credit conditions and weak domestic demand
- While FSG expects manufacturing output to continue expanding through the second half of the year, producers will continue to confront various challenges. Foremost are extended weak consumer demand and tight credit conditions, which are negatively affecting customers’ ability to invest and channel partners’ access to working capital
Most multinationals selling into the manufacturing sector in Brazil should expect near term sales growth, but will need to continue to evaluate their customer segmentation strategies, considering both industrial and geographic dynamics. Multinationals will also need to continue to deepen their due diligence on partners’ financial conditions and consider extending credit to customers in the market or the leasing expensive equipment to tap into opex budgets. Finally, multinationals should continue to review their scenario and contingency plans in the market monthly over the coming quarter as political uncertainty remains high. While the Brazilian economy is positioned to continue showing growth in the near term under heightened political uncertainty, a prolonged crisis and complete derailing of reform measures would likely push the market toward a double dip recession.
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