Brazilian economic activity and its setbacks in July and August suggest that the recovery could be slower than previously thought. Economic activity disappointed at the beginning of the second half of the year, suffering a deterioration from the previous months. In July, the index dropped 5.2% YoY, compared with June’s 2.9% fall and the GDP’s 4.6% YoY contraction in the first half of 2016. In August, economic activity decreased 2.7% YoY, comparing favorably to the 5.3% drop in the first seven months of the year. However, economic activity fell 0.91% on a monthly basis, marking its sharpest decline in fifteen months, suggesting that the recovery could be slower than previously thought. Indeed, analysts polled by the central bank now expect a larger drop in the economic activity this year (from -3.19 to -3.22% this week).

A turnaround in private consumption is still far from sight. The sharp annual contraction in retail sales, together with the deterioration in the labor market and the tightened credit conditions reinforce the view that there are little prospects for a turnaround in private consumption soon. So much so, that at the beginning of 3Q16, retail sales came below expectations, falling 5.5% YoY in August (vs. July’s downwardly revised 5.6% YoY decline).

The worsening of the labor market will likely hasten the contraction pace for private consumption. While the Brazilian economy has been unable to create jobs in the last sixteen months, driving the 12M figure to accumulate 1.71 million layoffs in July – hitting most sectors – the unemployment rate reached during the same month a new high (11.6%) since the series started. Back in May 2015, the rate stood at 8.3%.

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LATAM PM is a group of independent analysts providing policy and market intelligence to retail and institutional investors.

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