The mystery of industrial stagnation explained
Despite economic growth in recent years somewhat above the historical average, Brazil’s industrial sector continues to show low dynamism. Our interpretation is that one of the main obstacles to the sector’s growth is, paradoxically, the very expansionary economic policy, which stimulates demand in a context of a tight labor market, thereby compressing profit margins. Unit labor costs have risen both because of higher wages and declining productivity. Meanwhile, the currency has not depreciated proportionally, limiting the pass-through of costs to domestic prices. In this environment, industrial production remains constrained by rising costs, and a significant share of the increase in domestic demand for manufactured goods ends up being met through higher imports.
The Brazilian industrial sector has shown weak performance for over a decade and has never recovered the production levels observed before 2014. In recent years, it is noteworthy that this poor performance has occurred amid a context of buoyant aggregate demand, which should, in principle, have boosted industrial production. Our assessment is that strong domestic demand, in a context of a tight labor market, has paradoxically constrained industrial growth by raising production costs and squeezing profit margins.
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