Industry in Brazil closes 2021 in ‘delicate condition’, shows industry index

The Brazilian industry contracted in December, with lower volumes of sales and production, ending 2021 in “a delicate condition” according to the survey of Purchasing Managers Index (PMI, its acronym in English) by IHS Markit.

The survey released this Monday (3) showed that the index repeated in December the rate of 49.8 seen in November, with the PMI closing the last three months of the year with the worst quarterly performance since the second quarter of 2020.

Readings below 50 indicate contraction of activity.

“Despite starting 2021 on a solid footing, the manufacturing sector ended the year in contraction. Companies reduced production and generally halted replenishment efforts as the anticipated demand recovery did not materialize. With customers having enough products in their warehouses, new orders decreased in December,” explained Pollyanna De Lima, Associate Director of Economics at IHS Markit.

The last month of the year was marked by lower volumes of sales and production, with the respective sub-indices remaining in contraction in December.

According to IHS Markit, the drop in sales was due to weak domestic demand for products, as well as large inventories among customers and problems in the automotive sector.

“If the central bank is successful in reducing inflation next year, after successive periods of aggressive interest rate hikes, an improvement in real household wages could lead to a recovery in consumption,” added De Lima.

On the other hand, there was a recovery in orders from abroad, which accelerated for the second month in a row and at the strongest pace in more than a year.

Still, domestic demand and price pressures led manufacturers to restrict input purchases in December.

Input costs continued to rise in December, with companies citing higher prices for energy, raw materials and transportation amid persistent supply chain problems, raw material shortages and a stronger dollar.

Even so, the general inflation rate has weakened to a 17-month low, and part of the additional costs have been passed on to customers.

In December, job creation in the manufacturing sector almost stopped as companies were able to keep to maximum workloads due to sluggish demand.

But sector entrepreneurs were optimistic that demand and investment trends will improve in 2022, helping production growth.

According to the survey, the optimism was also related to the hope that weather conditions will be better and that the automotive sector will recover. This all pushed the overall positive sentiment level to a six-month high in December.

“But recent setbacks have made companies somewhat cautious in their valuations, with many taking a wait-and-see approach to spending decisions,” said De Lima.