BrazilWorks introduces our Economic Recovery Dashboard to report the monthly and quarterly trends among a select group of leading and lagging indicators. Indicators such as industrial activity, construction input production and retail sales measure activity in key economic activities that reflect increasing consumer demand for Brazilian made products. We expect such indicators to spell the first stages of economic recovery. As you can see from the IBOVESPA (São Paulo Stock Market Exchange), market traders have bet on Brazil's recovery throughout 2016, but this is not enough. Also, the industrial productivity and capital goods imports indicators are strong measures of the degree to which Brazilian industry is investing in international competitiveness, a factor that will determine the depth of national economic recovery and its sustainability over time. These need to increase over time and throughout the recovery.
The leading indicators also includes the Central Bank's aggregate index of economic activity that should move in accordance with the other leading variables, it should demonstrate the validity of the leading and lagging indicators over time. Let's watch this index closely.
The lagging indicators, including average wages and formal employment, are key to understanding the depth of the recovery and whether it is accompanied by a structural transformation that leads to greater formal employment and productivity, or whether it spells greater employment precariousness and a hollowing out of the economy's capacity to generate demand-similar to the effects in the USA where productivity increases while wages flatten.
For October 2016 it appears that there are signs of recovery, but distant and elusive. The IBOVESPA leading indicator shows investor optimism, probably due to the impeachment of former President Dilma Rousseff from April to August of 2016, but this could be tenuous if there are additional economic or political setbacks. The more churning leading indicators, industrial activity, retail sales, and construction input production also demonstrate a positive, albeit tenuous direction. However, the more transformative indicators of industrial productivity and capital goods imports remain in the red, an alert that the economy is not yet prepared for a sustainable and deep economic recovery.
Brazilian policymakers are still shaken or celebrating from the impeachment process, the municipal elections, and the Lava Jato corruption investigations. However, Temer's government and congressional coalition seem committed to restoring fiscal stability at any cost; and at this moment it would seem plausible to expect the Brazilian Congress to comply with measures to cut the budget deficit. This outcome coupled with falling inflation measures (including Petrobras' recent decision to cut transportation fuel prices) could lead to a reduction in interest rates that would contribute to economic recovery (but be matched by falling government expenditures that have a recessionary effect). The objective is to lower the real structural interest rates over time and keep them within a competitive band so that Brazilians can invest in their economy rather than depending on government or foreign direct investment. We need to monitor progress in this area. If the Brazilian private sector gets back to investing (and move away from dependence on financing government debt) in the national economy, then expect productivity and the capital goods market to increase.
The question is, what can President Temer do, with Congressional support, to ease private sector investment in productivity increasing activities in the short to medium terms?