Brazil Retail Sales Shine Light on Economy's Decline

07/16/2015 - 09h01

Another day, another disastrous data point from Brazil. The national statistics office revealed on Tuesday (14) that retail sales fell a seasonally adjusted 0.9 per cent in May from April and by (an unadjusted) 4.5 per cent year on year.

The figures were much worse than expected. A Bloomberg survey had predicted a 0.3 per cent month-on-month contraction in the headline figure. A look into the detail shows the extent to which Brazil's consumer credit-driven growth model has collapsed.

The least dramatic contraction, but one of the most worrying, was in sales at hypermarkets and supermarkets. These fell 2.1 per cent year on year and by a sharper (seasonally adjusted) 0.8 per cent month on month. If Brazilians are spending less on household essentials, they must be feeling the squeeze.

There were more spectacular falls in bigger ticket items. Sales of furniture and household electrical goods were down 18.5 per cent year on year, their biggest fall since the series began in 2001.

Sales of vehicles and auto parts fell even more, by more than 22 per cent year on year.

Both these subsectors were emblematic of the rise of Brazil's new "middle class" in the years before and after the global financial crisis of 2007-08.

Helped along first by the commodities boom and then by a government-sponsored credit binge, millions of people entered the consumer market for the first time and splashed out on fridges, cookers, TVs and cars, often on credit at Brazil's exorbitant interest rates.

They have stopped doing that now and gone into reverse at a frantic pace.

The broad retail index - which captures these items as well as construction materials, another beneficiary of the boom years - reflects the extent to which Brazilians have pulled in their spending. It was down 10.4 per cent year on year in May.

Unsurprisingly, unemployment has picked up as sales have fallen, with job creation going alarmingly into reverse. But inflation remains stubbornly high. The central bank's latest survey of market economists sees it ending 2015 above 9 per cent, more than double the government's 4.5 per cent target.

This is beyond the ugly and painful phenomenon of stagflation: if Brazil's economy were stagnant, rather than contracting by an expected 1.5 per cent or more this year, the situation would be less dire.

Tuesday's retail sales will make it harder for the central bank to raise interest rates again at its next monetary policy meeting on July 29. Inflation will push it the other way.

Copyright The Financial Times Limited 2015