Services sector prop up optimism as omicron appears on radar

Services sector prop up optimism as omicron appears on radar

Others segments know that recovery has already peaked, see ahead impacts of inflation and high interest rates

Valor Econômico, By Anaïs Fernandes — São Paulo. 09/01/2022

Faced with a discouraging outlook for the Brazilian economy this year, which may not escape a contraction, some segments that still have room to recover from the pandemic shocks manage to remain upbeat. Others know that any recovery has already peaked and see ahead the impacts of inflation and high interest rates on the willingness of households to spend.

The Business Survey of Fundação Getulio Vargas’s Brazilian Institute of Economy (FGV/Ibre) shows that the accommodation services segment (hotels) was the most optimistic in relation to its activity in the near future (three to six months), with an expectation index of 119.6 points, considering the average of the last quarter of 2021. Figures above 100 indicate upbeat expectations; below that, pessimism.

Aloisio Campelo Jr. — Foto: Daniel Wainstein/Valor

Aloisio Campelo Jr. — Foto: Daniel Wainstein/Valor

This segment, as well as food services (restaurants), which is also among the ten most optimistic with 104.2 points, is part of a group that only recently started to see a much better situation than in 2020, said Aloisio Campelo Jr., head of public statistics at FGV/Ibre. And the optimism in these fields, he said, may also have to do with the fact that the horizon cannot be much worse than it has been.

“This pandemic was brutal for everyone, but it was especially devastating for tourism. Every unsold night is a total loss. At the peak of the first wave, we had 80% of the Brazilian hotel industry closed, with an occupation rate of 5% to 8%, while our breakeven point is 50% or 60%,” said Manoel Linhares, head of the Brazilian Association of the Hotel Industry (Abih).

Also on the optimists’ list and in a similar situation is the group of “other services provided to households” (gyms, hairdressers, etc), with 104 points. “These recovery cycles are still helping,” Mr. Campelo said. “We must only see if omicron will ruin the party,” he said.

The data from the December polls do not seem to reflect yet a greater fear regarding the spread of the variant of the coronavirus through Brazil, with companies paying more attention to the macroeconomic scenario, said Rodolpho Tobler, coordinator of FGV/Ibre’s Commerce Survey. For him, the indicator for January may show a different feeling on the part of the business community associated with the worsening of the pandemic.

In the manufacturing sector, the most optimistic about the future are the chemical industry (117 points), motor vehicles (110), machinery and equipment (106.9) and other transport equipment (104.2), which includes, for example, motorcycles. The automotive and related industries have faced supply problems, mainly related to semiconductors, but companies are apparently confident that, as soon as the input issues are solved, there would be a pent-up demand to be met, Mr. Campelo said.

There are no retail representatives among the segments most optimistic about the beginning of 2022. Among the ten most pessimistic, however, are furniture and appliances (80.5 points in the average expectations index for the last quarter of 2021), construction materials (84.4), hyper and supermarkets (85.6) and a broad category of “other retailers” (89.2).

“The furniture, home appliance retail is kind of downbeat now because there has already been a shopping spree. People, mainly from the middle and upper classes, bought many things for their homes during the pandemic,” Mr. Campelo recalled.

That is also why, he points out, the machinery, appliances and electrical material industry – which includes white goods (refrigerator, stove, microwave oven) – is among the ten most pessimistic, with an average expectations index of 76.2 points. “People have already spent on that while working from home. Now families are more indebted and have less breathing room. In addition, the products became more expensive as interest rates are higher,” the economist said.

Brazilians’ consumption pattern is likely to change because of higher prices, which may help explain not only why supermarkets are among the most pessimistic, but also the food industry (84.1 points), although these segments are resilient, Mr. Campelo said. “Inflation is very high, so people will buy cheaper things, replace brands,” he said, adding that companies may be projecting shrinking margins as a result.

The most pessimistic segment, however, is the one that includes cleaning and perfumery industries, with an average expectations index of 61.4 points. The sector faces the high costs of inputs, packaging, fuel and energy, said Paulo Engler, executive director of the Brazilian Association of Hygiene, Cleaning and Sanitizing Products (Abipla).

“The strong weakening of the real directly impacts the cost of production, since several inputs are priced in dollars. In addition, fuels have a heavy weight in our production chain, whether to receive raw materials or in the distribution of products, as well as electricity,” he said.

Another point, according to him, is that the segment’s products are very sensitive to prices and, therefore, manufacturers have sacrificed margins to remain competitive and avoid fully passing on higher production costs to final prices.