The recession in Argentina and industrial production in Brazil

BRAZIL ECONOMICS - Report 21 Jan 2019 by Affonso Pastore, Cristina Pinotti, Marcelo Gazzano and Caio Carbone

The extreme lethargy of Brazil’s cyclical recovery is also accounted by the weak industrial performance. Even with the substantial decrease of the real interest rate and the relatively weaker trade-weighted real exchange rate, industrial output has not presented signs of reaction yet. With the high level of slack capacity, it is perfectly possible that the average labor productivity has declined to the point where not even this weaker trade-weighted real exchange rate has been able to prevent a rise of the unit labor cost, penalizing exports. In this note we do not intend to exhaustively examine the subject, instead only aiming to provide a partial explanation. The production of durable consumer goods, in particular automobiles, showed the best performance among manufacturing activities until the end of 2017. A counterfactual exercise indicates that: this movement was in part explained by exports to Argentina; and the recession in that country has sharply contracted that country’s imports of Brazilian manufactures in 2018, with negative effects on Brazil’s industrial GDP.

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