Capital goods imports gain ground, suggesting higher productive capacity

In line with the heated economic activity, capital goods imports in Brazil grew by 20% from January to September this year, reaching $26.4 billion. These figures indicate an expansion of the Brazilian economy’s productive capacity for the coming years, although the new cycle of the key interest rate Selic hikes may slow this process down.

According to the latest data from the Foreign Trade Secretariat of the Ministry of Development, Industry, Trade, and Services, Brazil’s total imports increased by 8% through September 2024, compared to the same period last year. This growth was also driven by economic activity but occurred significantly slower than capital goods imports, as also recorded by the Ministry of Industry. Private-sector economists project a 3% growth in GDP this year, according to the median estimate in the latest Central Bank Focus survey. Meanwhile, the Ministry of Finance and the Central Bank forecast 3.2% growth, and the World Bank, in a report released on Wednesday, projects a 2.8% increase.

“Capital goods imports are growing significantly,” said Herlon Brandão, head of foreign trade statistics and studies at the Ministry of Industry, during a press conference last Friday to discuss the September trade balance data. “The economy is growing and demanding more imported goods.”

The increase in capital goods imports this year has been driven by volume, up 22.1%, while prices dropped by 3.3%. In other words, if prices had remained stable, the growth in value would have been even higher. According to a study by the Ministry of Industry at Valor’s request, imports rose in all 10 categories of capital goods during the first nine months of 2024. At 79%, the highest increase was observed in other transportation equipment, reaching $2.4 billion. Machinery and equipment were the largest import category, with $10.6 billion, a 16.9% increase.

“We’re talking about expanding the productive capacity of the Brazilian economy, and that’s positive,” said Alessandra Ribeiro, head of macroeconomics and sectoral analysis at Tendências Consultoria.

“There is a revival in investments and industry, which is also beneficial from an inflation control perspective, as this recovery translates into increased supply,” said Rafael Cagnin, an economist at the Institute for Industrial Development Studies (IEDI).

In its Inflation Report released at the end of September, the Central Bank said a “sharp rise” in capital goods imports was one factor behind the “high growth rates for the third consecutive quarter and in a reasonably widespread manner” of Gross Fixed Capital Formation (GFCF). As a result, GFCF—a measure of investment in machinery, equipment, and innovation—reached its highest level since the first quarter of 2015.

For the Central Bank, the increase in capital goods imports is linked “to the growth of the manufacturing industry and investments,” and supports the “heated state of the domestic economy.” At that time, the Central Bank raised its forecasts for GFCF growth in 2024 to 5.5% from 4.5% and GDP growth to 3.2% from 2.3%.

In addition to strong economic performance, the rise in capital goods imports is also attributed by economists to the New Growth Acceleration Program (PAC) and the federal government’s expanded investment initiatives. As Valor reported in September, federal government investments reached their highest level in nine years during the first seven months of 2024, totaling R$32 billion.

José Velloso, president of the Brazilian Machinery and Equipment Industry Association (ABIMAQ), noted that the surge in machinery and equipment imports—the largest segment of capital goods—is driven by two main factors. First, China’s new “strategic shift,” which prioritizes exporting these goods to countries like Brazil after the U.S. and the European Union adopted more protectionist measures. Second, the lack of competitiveness in Brazil’s sector relative to Chinese production, due to higher input, capital, and tax costs.

One factor economists believe could further boost capital goods imports through the end of next year is the introduction of the super-accelerated depreciation mechanism for industry, which took effect in September. The mechanism allows companies to deduct investments in machinery and equipment from their Business Income Tax and Social Contribution on Net Income over a period of up to two years, with R$3.4 billion allocated for this purpose until the end of 2025.

Vice President Geraldo Alckmin considers super-accelerated depreciation the key measure of the New Brazil Industry Program, a set of industrial sector proposals launched by the federal government earlier this year.

Nevertheless, the Central Bank said in the Inflation Report that the overall level of investment in both public and private sectors remained “significantly below historical highs” and that the GFCF-to-GDP ratio is “below the historical average.”

Moreover, due to “more restrictive monetary conditions,” the Central Bank’s estimates for 2025 project 2% growth for both GFCF and GDP—below the projections for this year. In September, the Central Bank raised the Selic rate by 25 basis points to 10.75% per year, citing “resilience in economic activity, labor market pressures, a positive output gap (economy activity above potential), rising inflation forecasts, and unanchored expectations.” Additionally, the Central Bank signaled further rate hikes. The market, for instance, projects that Brazil’s key interest rate will end 2024 at 11.75%, according to the median estimate from the Focus survey.

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