Brazilian Indicators Signal an Economy in Crisis

CEIC Brazil Data Talk - August 4, 2015 Deterioration of the Brazilian economy is continuing and is illustrated in some of its key macro-indicators, such as retail trade, measures of industrial and services sector output, and also consumer and entrepreneur confidence. The retail trade index fell by 8.5% in May 2015 compared with the same period of the previous year and services sector output growth slowed to just 3.8% from 8.2% over the same period. The situation was even worse in the industrial sector where production contracted by 6.2% year-on-year (YoY) in May 2015. Slower growth – and indeed, outright deterioration – in the industrial and service sectors is indicative of the general state of the economy which may well become worse as it affects business and consumer sentiment which further weakens the economy. The entrepreneur confidence indicator declined to 37.2 points in July 2015; it has remained below 50 points, indicating economic contraction, since April 2014. The National Consumer Confidence Index likewise slid by 9.5% in June 2015 to 96.2 points (2001=100), its lowest value since June 2001. Other economic indicators have similarly worsened in recent months. According to the Brazilian statistical agency IBGE, the unemployment rate rose to 6.9% in July 2015, its highest level since August 2010. The continuous National Household Sample Survey (the “Continuous PNAD”, a new and separate survey from IBGE) suggests the unemployment rate was as high as 8.1% in May 2015, reaching its highest since the survey began in January 2012. Figures from the Ministry of Labor and Employment show the balance of employment stood at -111,199 in July 2015, implying the number of laid off people exceeded those employed. There were 1,453,335 newly employed persons during the month compared to 1,564,534 that were laid off. Inflation has also worsened in recent months, rising to 8.9% YoY in June which is the worst result since December 2003 and was mainly influenced by the government’s fiscal consolidation efforts which saw increases in various taxes including the newly introduced gasoline and diesel tax, and taxation on personal loans, and imported goods and cosmetics, among others. Similarly, real GDP declined by 1.5% YoY in the first quarter of 2015. The market expectation report obtained from the Central Bank of Brazil suggests an average decline of 1.5% for the year. Despite the hype surrounding Brazil’s growth prospects in previous years, its fortunes have taken a turn for the worse, with the economy edging towards recession. While it is difficult to pinpoint a single factor for the reversal of fortunes, weak commodity prices and poor governance are certainly causes. On the latter point, corruption scandals plaguing the government have shaken confidence among businesses and consumers alike. These issues have been further compounded by misguided policy directions in the past, including over-zealous credit expansion and poor fiscal management. With the economy in a downturn the government has been forced to make fiscal adjustments, which includes reducing government spending and raising taxation to cover the anticipated shortfall in revenue. Additionally, the government has altered its 2015 primary surplus target to 0.15% of GDP from 1.1% due to the reduction in revenue and increase in expenditure (such as higher unemployment insurance). These fiscal adjustments and shifts in fiscal targets are likely to further affect the real economy and alter investor sentiment towards Brazil. Brazil’s economic outlook is expected to remain bleak, at least in the short term, as the markets react towards the government’s de facto admission of the deterioration. At the same time, fiscal consolidation amid a period of low growth may exert further inflationary pressures on the economy given the tax rises and the depreciating Brazilian Real. With the Selic rate already at 13.75%, it is doubtful if further monetary tightening may be sufficient to temper these inflationary pressures without also deepening the economic crisis. By Bruna Ferreira - CEIC Analyst Discuss this post and many other topics in our LinkedIn Group (you must be a LinkedIn member to participate). Request a Free Trial Subscription. Back to Blog
4th August 2015 Brazilian Indicators Signal an Economy in Crisis

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