How Brazil’s economy depends on the construction sector

Anna Carolina Lemos Gouveia . Apr 07, 2019

The Brazilian recession ended over two years ago, but the country’s economy remains sluggish—almost flatlining. After falling 9.9 percent between the February 2014 peak and October 2016 valley, the economy has grown by only 4 percent until January 2019, according to the monthly GDP monitor developed by think tank Fundação Getulio Vargas. Adding up every phase of recession and recovery in the 59 months after the economy peaked, we are left with one of the worst economic cycles in Brazilian history.

The chart below shows the GDP losses in all Brazilian recessions since 1980. and the accumulated growth in the 27 months which followed. Excluding 2014–2016, the average loss in recessive periods is of 5.1 percent—followed by an average 10.3-percent growth in the following 27 months. In other words, not only were we below the average levels of growth in times of expansion, but, by now, the Brazilian economy should have already recovered the losses of 2014–2016.

<img loading="lazy" class="alignnone size-large wp-image-15500" src="https://brazilian.report/wp-content/uploads/2019/04/Screen-Shot-2019-04-07-at-12.36.14-1024x214.png" alt="construction sector brazil recession" width="1024" height="214" srcset="https://brazilian.report/wp-content/uploads/2019/04/Screen-Shot-2019-04-07-at-12.36.14-1024x214.png 1024w, https://brazilian.report/wp-content/uploads/2019/04/Screen-Shot-2019-04-07-at-12.36.14-300x63.png 300w, https://brazilian.report/wp-content/uploads/2019/04/Screen-Shot-2019-04-07-at-12.36.14-768x160.png 768w, https://brazilian.report/wp-content/uploads/2019/04/Screen-Shot-2019-04-07-at-12.36.14-610x127.png 610w, https://brazilian.report/wp-content/uploads/2019/04/Screen-Shot-2019-04-07-at-12.36.14.png 1908w" sizes="(max-width: 1024px) 100vw, 1024px" /> Instead, the country has regained only 36.2 percent of its economic losses, in monthly terms. Moreover, in the 59 months following the economy’s peak, the country’s GDP shrank by 6.3 percent. Although there aren’t reliable quarterly statistics before 1980, an annual analysis of the Brazilian GDP suggests that not even the profound 1930 recession was as intense—or as long-lasting. The data above shows us that 27 months is a reasonable enough timetable for a post-recession recovery. After the 1987–1988 recession, the economy grew for only eight months before plunging into another crisis. Analyzing the progression of Brazil’s GDP through a mobile 59-month window, we see that January 2019 was only better than May 2018—when Brazilian truckers went on strike and nearly paralyzed the country for 11 days. Therefore, even when the Brazilian economy has quickly fallen into a second recession, it performed better in a 59-month window than it is doing now. <hr /> <h3 style="text-align: center;">Adjusted variation (%) in a 59-month window</h3> <img loading="lazy" class="alignnone size-large wp-image-15498" src="https://brazilian.report/wp-content/uploads/2019/04/Screen-Shot-2019-04-07-at-12.27.56-1024x616.png" alt="construction sector brazil recession" width="1024" height="616" srcset="https://brazilian.report/wp-content/uploads/2019/04/Screen-Shot-2019-04-07-at-12.27.56-1024x616.png 1024w, https://brazilian.report/wp-content/uploads/2019/04/Screen-Shot-2019-04-07-at-12.27.56-300x180.png 300w, https://brazilian.report/wp-content/uploads/2019/04/Screen-Shot-2019-04-07-at-12.27.56-768x462.png 768w, https://brazilian.report/wp-content/uploads/2019/04/Screen-Shot-2019-04-07-at-12.27.56-610x367.png 610w, https://brazilian.report/wp-content/uploads/2019/04/Screen-Shot-2019-04-07-at-12.27.56.png 1546w" sizes="(max-width: 1024px) 100vw, 1024px" /> <hr /> If the country observes the same growth rhythm of 2018 (which fortunately seems unlikely), it is possible that the economy will only return to 2014 levels in 2025. If we consider markets’ forecasts for Brazil’s GDP growth, this definitive recovery would come in 2021. <h2>The disastrous performance of the construction sector</h2> When we analyze the country’s main economic sectors separately, industry and services have slowly recovered since the end of the recession. Over the 27 months following the downturn, industry grew 2.1 percent and the services sector picked up by 3.9 percent. Only agriculture fared better, reaching a 12.7 percent growth. <hr /> <h3 style="text-align: center;">Growth since Brazil’s last recession, per sector</h3> <img loading="lazy" class="alignnone size-large wp-image-15497" src="https://brazilian.report/wp-content/uploads/2019/04/Screen-Shot-2019-04-07-at-12.28.10-1024x625.png" alt="construction sector brazil recession" width="1024" height="625" srcset="https://brazilian.report/wp-content/uploads/2019/04/Screen-Shot-2019-04-07-at-12.28.10-1024x625.png 1024w, https://brazilian.report/wp-content/uploads/2019/04/Screen-Shot-2019-04-07-at-12.28.10-300x183.png 300w, https://brazilian.report/wp-content/uploads/2019/04/Screen-Shot-2019-04-07-at-12.28.10-768x468.png 768w, https://brazilian.report/wp-content/uploads/2019/04/Screen-Shot-2019-04-07-at-12.28.10-610x372.png 610w, https://brazilian.report/wp-content/uploads/2019/04/Screen-Shot-2019-04-07-at-12.28.10.png 1800w" sizes="(max-width: 1024px) 100vw, 1024px" /> <hr /> <h3 style="text-align: center;">Growth since Brazil’s last recession, per industry segment</h3> <img loading="lazy" class="alignnone size-large wp-image-15496" src="https://brazilian.report/wp-content/uploads/2019/04/Screen-Shot-2019-04-07-at-12.28.22-1024x562.png" alt="construction sector brazil recession" width="1024" height="562" srcset="https://brazilian.report/wp-content/uploads/2019/04/Screen-Shot-2019-04-07-at-12.28.22-1024x562.png 1024w, https://brazilian.report/wp-content/uploads/2019/04/Screen-Shot-2019-04-07-at-12.28.22-300x165.png 300w, https://brazilian.report/wp-content/uploads/2019/04/Screen-Shot-2019-04-07-at-12.28.22-768x422.png 768w, https://brazilian.report/wp-content/uploads/2019/04/Screen-Shot-2019-04-07-at-12.28.22-610x335.png 610w, https://brazilian.report/wp-content/uploads/2019/04/Screen-Shot-2019-04-07-at-12.28.22.png 1760w" sizes="(max-width: 1024px) 100vw, 1024px" /> <hr /> Looking closely at the sub-sectors of industry, construction represents a particular reason for concern. In January 2019, the sector is still below October 2016 levels, which was the lowest point of the last recession. Its post-recession losses of 6 percent are made all the more damning when compared with the 6.9%, 4.2%, and 3.5% growth figures posted by the electricity, extractive, and transformative sectors during the same period. In terms of demand, results are equally poor. In January 2019, household consumption had recovered 51 percent of its losses, while the acquisition of fixed assets by the business sector only managed to recuperate 12 percent. Looking back at past recessions, by 27 months post-crisis, family consumption had increased by an average of 220 percent, and investments recovered 49 percent. <img loading="lazy" class="alignnone size-large wp-image-15495" src="https://brazilian.report/wp-content/uploads/2019/04/Screen-Shot-2019-04-07-at-12.29.56-1024x256.png" alt="construction sector brazil recession" width="1024" height="256" srcset="https://brazilian.report/wp-content/uploads/2019/04/Screen-Shot-2019-04-07-at-12.29.56-1024x256.png 1024w, https://brazilian.report/wp-content/uploads/2019/04/Screen-Shot-2019-04-07-at-12.29.56-300x75.png 300w, https://brazilian.report/wp-content/uploads/2019/04/Screen-Shot-2019-04-07-at-12.29.56-768x192.png 768w, https://brazilian.report/wp-content/uploads/2019/04/Screen-Shot-2019-04-07-at-12.29.56-610x153.png 610w, https://brazilian.report/wp-content/uploads/2019/04/Screen-Shot-2019-04-07-at-12.29.56.png 1736w" sizes="(max-width: 1024px) 100vw, 1024px" /> A look at the two leading components of fixed asset acquisition shows, once again, how weak the construction sector has been in this post-recession period. In previous economic recoveries, the sectors of machinery & equipment and construction displayed similar median growth patterns. After 27 months the former had recovered 33 percent, and the latter, 35 percent. In this current expansion phase, machinery & equipment has only managed to recoup 15 percent of its losses, while construction has been unable to make any recovery whatsoever. In relative terms, we can state that the worst performing sector in this crisis was construction, with its longer cycles that often result in slow recoveries. However, this time around, the sector has been hit by a perfect storm. As well as the recession, the construction industry has endured the financial and political difficulties of recent governments, as well as the impact of the Operation Car Wash corruption investigation on several of the sector’s major firms. Beyond the slow and troublesome recovery up to this point, the construction sector has yet to give any signs of real recovery in the coming years. Of Brazil’s four largest sectors, confidence levels are the lowest in construction. Forecasts of recovery, which have improved slightly after the changing of the government, are yet to show any optimism. <hr /> <h3 style="text-align: center;">Confidence levels among businessmen</h3> <img loading="lazy" class="alignnone size-large wp-image-15494" src="https://brazilian.report/wp-content/uploads/2019/04/Screen-Shot-2019-04-07-at-12.30.18-1024x579.png" alt="construction sector brazil recession" width="1024" height="579" srcset="https://brazilian.report/wp-content/uploads/2019/04/Screen-Shot-2019-04-07-at-12.30.18-1024x579.png 1024w, https://brazilian.report/wp-content/uploads/2019/04/Screen-Shot-2019-04-07-at-12.30.18-300x170.png 300w, https://brazilian.report/wp-content/uploads/2019/04/Screen-Shot-2019-04-07-at-12.30.18-768x435.png 768w, https://brazilian.report/wp-content/uploads/2019/04/Screen-Shot-2019-04-07-at-12.30.18-610x345.png 610w, https://brazilian.report/wp-content/uploads/2019/04/Screen-Shot-2019-04-07-at-12.30.18.png 1488w" sizes="(max-width: 1024px) 100vw, 1024px" /> <hr /> In summary, besides Brazil’s timid GDP recovery two years and three months after the end of the recession, prospects for the construction sector remain bleak in comparison to other segments of the economy. With the economy growing slowly, it could take the sector some time to find a path to consistent medium or long-term growth. While the construction sector has been an important factor in Brazil’s slow recovery up to this point, it could become crucial in efforts to boost the economy in 2019, as it is a very labor-intensive segment. Some optimism is justified, therefore, in the government’s move to auction concessions and the infrastructure investments which will come as a result. <a href="https://blogdoibre.fgv.br/posts/construcao-teve-papel-importante-na-crise-mas-pode-ajudar-daqui-para-frente">This article was originally published by IBRE-FGV</a>

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Anna Carolina Lemos Gouveia

Researcher at think tank Fundação Getulio Vargas. She holds a master's degree in economics from the Federal University of Rio de Janeiro.

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