BRAZILIAN INDUSTRIAL RECESSION DURING THE FIRST QUARTER OF 1965

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP79T01003A002300040001-1
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 12
• Document Creation Date: December 9, 2016
• Document Release Date: March 29, 2001
• Sequence Number: 1
• Publication Date: May 1, 1965
• Content Type: BRIEF

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BRAZILIAN INDUSTRIAL RECESSION
DURING THE FIRST QUARTER OF 1.965
DIRECTORATE OF INTELLIGENCE
Office of Research and Reports
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This Document contains information affecting the Na-
tional Defense of the United States, within the mean-
ing of Title 18, Sections 793 and 794, of the U.B. Code, as
amended. Its transmission or revelation of its contents
to or receipt by an unauthorized person is prohibited
by law. The reproduction of this form is prohibited.
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C-O-N-F-I-D-E-N-T-I-A-L
. BRAZILIAN INDUSTRIAL RECESSION
DURING THE FIRST QUARTER OF 1965
The persistent character of Brazil's economic problems was clearly
reflected in the first quarter of this year by a rapid rise in unemployment
and a decline in industrial production. Having moderated inflationary
pressures and undertaken a number of basic economic reforms, the
government now faces a stern test of its willingness to sustain counter-
inflationary programs in the face of declining industrial activity. The
business community is inclined to blame current difficulties on the govern-
ment' s restrictive credit policy; however., a sharp drop in consumer ex-
penditures, particularly for durables, seems the more likely trigger for
this decline. The consumer, under pressure from rising prices for
previously subsidized goods and services, may be deferring purchases
of high-price durables until it is clear whether the regime can deliver
on its promises to reduce the rate of inflation. Price resistance by
consumers suggests that the government may be slowly gaining support
for its counter-inflationary program. Should the government be able
to win support from the business community to restrain price increases,
President Branco and his financial advisers will have taken a significant
step on the road to Brazil's economic recovery.
The slackening of the tempo of industrial activity during the first
quarter of 1965 indicates that Brazil is undergoing a mild recession.
As the Castello Branco government marked the first anniversary of
its accession to power on 31 March, the principal industrial center
of the country -- Sao Paulo -- reported retrenchment of production
schedules, an increasing number of firms in financial difficulties,
some signs of unemployment, and excess inventories of consumer
durables. Most seriously affected by the. downturn are the automobile
and textile industries, but production declines also were reported in
automobile parts, home appliances, plastic products, paints, glass,
footwear, and furniture.
Several industrial sectors, however, continue to report favorable
business conditions. Food processing and machine tool firms have
not been adversely affected, and Brazil's largest steel producer, the
government-owned Companhia Siderurgica Nacional, reported higher
than normal monthly output in March. Furthermore, within the gener-
ally depressed motor vehicle industry, Volkswagen, the principal
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manufacturer among Brazil's 11 automotive concerns, reported a new
production record of 7, 002 units in March.
2. Unemployment
Although Brazilian statistics on unemployment are virtually non-
existent, unofficial data for the city of Sao Paulo may serve as an
indicator of the general trend of employment in industry. In a survey
conducted by an industrial trade association, unemployment in the city
was estimated to be about 3, 500 people in January, 2, 750 in February,
and 56, 000 in March. The unemployment levels for January and
February are considered to be normal, but the number of unemployed
in March, which amounts to approximately 8. 5 percent of the city's
labor force, is not normal.
3. Downturn in the Motor Vehicle Industry
Most seriously affected by the downturn is the motor vehicle
industry. In March, automobile manufacturers reported s-ales of
passenger cars to be 20 to 35 percent below the levels of November
and December 1964. At least three major producers -- Ford,
General Motors, and Willys Overland -- closed down their plants
for periods of 1 to 2 weeks, placing the work force on vacation in
advance of the time normally scheduled. Layoffs of administrative
and production-line personnel in the industry totaled about 5, 500
people by 7 March (about 1Z percent of the industry's labor force),
and additional layoffs were scheduled for the beginning of April.
With finished inventories of trucks and passenger cars accumulating
at factory and retail levels, manufacturers are reducing procurement
orders for parts, components, and materials, with the consequence
that unemployment in this industry is on the rise. One industry
official expected unemployment in the automobile parts plants to
total about 10, 000 people by the end of March.
Officials of the motor vehicle industry attribute their difficulties
to any number of causes, but one factor -- consumer resistance to
the high prices of motor vehicles -- receives particular emphasis.
In fact, consumer resistance to high-priced durables in general
has been increasing since the turn of the year. One manufacturer
of refrigerators reported that stocks totaled about 12, 000 units at
the end of March and that sales were running at 1, 500 units per month
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compared with monthly sales of 4, 000 units in November-December
1964. In an effort to liquidate excessive inventories of consumer
durables, appliance dealers in Sao Paulo and Rio de Janeiro initiated
a series of price reductions during March forsuch items as television
sets, sewing machines, refrigerators, and washing machines.
Elements of the Brazilian business community blame the current
economic downturn on the government's restrictive credit policy
which has been in force since the last quarter of 1964 and which is
an essential element of the regime's financial stabilization plan.
The continued application of this policy in the first quarter of 1965
has been accompanied by an increase in the number of business
failures. In February 1965, bankruptcy petitions in Sao Paulo totaled
161 compared with 126 petitions in January 1965 -- an increase of
28 percent (68 percent above the 96 petitions entered in February
1964). Significantly, the majority of business failures have been
restricted to small firms. In general, these firms were marginal
enterprises, depending on speculation and abnormal credit facilities
for their survival. Undoubtedly the restriction of credit by financial
authorities is an important factor in explaining the relatively high
level of business failures since the beginning of 1965. Nevertheless,
the downturn in business activity is due more to a sharp decline in
consumer demand, notably for consumer durables, than to the govern-
ment's tight credit policy. The response of consumers to price cuts
for durables is reported to be favorable and seems to indicate that
buyers have been delaying purchases and waiting for lower prices.
5. Campaign to Restrain Price Increases
The government is optimistic that consumer-induced price cuts
presage a change from pricing practices prevailing on the part of
manufacturers and retailers and a reversal of the inflationary men-
tality of the Brazilian public. Conditioned to inflation as a way of
life, businessmen are addicted to price markups that cover not only
past increases in costs but also expectations of future increases as
well. Heretofore, consumers willingly absorbed the markups because
of their outlook of "buy today because prices will be higher tomorrow. "
In the public's view, purchases of consumer durables constituted a
hedge against the steadily depreciating value of the cruzeiro.
Beginning in February 1965, the regime initiated a vigorous
campaign to counteract the inflationary mentality of the Brazilian
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public in general and of the business community in particular. The
administration, iri the person of President Branco and his leading
financial advisers, delivered a series of addresses before business
and trade organizations warning the business community that the
practice of anticipatory price increases must cease. As an induce-
ment for business firms to limit price increases during the remainder
of 1965, the Branco government is preparing to grant financial benefits
to enterprises adhering to the regime's price restraint program. To
firms agreeing to maintain prices prevailing at the end of January
1965 or receiving prior government authorization to increase prices
on the basis of proven increases in costs, the government will allow
tax benefits (subject to Congressional approval) and certain monetary
advantages. Included in the latter category, and having an immediate
impact on a firm's daily operations, will be an increase in the weekly
limit on purchases of foreign exchange for imports, greater access
to credit facilities from the Bank of Brazil, and an exemption from the
10-percent surcharge on purchases of exchange for imports and from
compulsory advance deposits for exchange to cover merchandise
imports.
6. Business Reaction
The initial reaction to the government's fiscal-monetary incentives
has been mixed. -Industrialists in Sao Paulo are reported to be skep-
tical of the government's ability to administer the price restraint
program. They contend that the difficulties of enforcement in many
sectors of industry together with inadequate staffs of government
agencies will make the program unworkable. Despite these misgiv-
ings, an increasing number of firms are entering into agreements
with the Superintendency of National Supplies, the federal agency that
will police the program. These businessmen apparently believe that
only through adherence to the regime's price restraint program will
they have access to the bank credit they need to finance commercial
activity.
25X1A
Analyst:
Coord: MOCI
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SERIES NUMBER
CIA/RR GB 65-31
CLASSIFICATION OF REPORT
Confidential
DISTRIBUTION TO RC
50
DATE OF DOCUMENT
Ma 1965
NUMBER OF COPIES
280
NUMBER IN RC
DATE
COPY
NO.(S)
RECIPIENT
SENT
RETURNED
32
DAD/RR
13 May 65
14 M y 65
33
AD/RR
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SUBJECT: Distribution of Current Support Brief No.
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Recipient
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ONE
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St/A/DS Distribution of Current Support Brief No. 65.31, Brazilian
Zndustrisl Recession During the First Quarter of 196'5 (CONFI -ENT1ALL
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 Approved For Release 2001/04/27 : C E002300040001-1
18 May 1965
MEMORANDUM FOR: Chief, Dissemination Control Branch, DD/CR
FROM Chief, Publications Staff, ORR
SUBJECT Transmittal of Material
It is requested that the attached copies of CIA/.RR CB 65-31,
Brazilian induatrisi Recession Turin the First quarter o 1965,
May 1965, Confidential, be fox ,+ ardle as follows-,
State, INR Communications Center,
Room 6527, State Dept. Bldg.
Suggested distribution for
Embassies in Bonn, aenevap The Hague,
Lisbon, London, Madrid, Paris, Tokyo,,
Cairo, Tel Aviv, Mexico, Guatemala,
Psnena, Brazillia, Buenos Aires,
Bogota,; Santiago, La. Paz,, Montevideo,.
and Caracas
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c nC
Attachments:
Copies #199 - #218 of CB 05-3l
cc: CGS/BB
. 11 C
The diss? rf3;;u' ,`? by
this memorandum, has been completed,
BY:72'' '
Dates
r, r in.
Rij
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