Brazil retail sales pointing to a continued decline of consumption in Q3

Brazil retail sales fell 3.5% yoy in Q2 following the 0.8% yoy decline in Q1. Given the sharp rise in the unemployment rate in Q3, and the trend in sales in July-August, it is estimated that retail sales declined 7.4% yoy (-0.9% mom) in September. Based on the forecast, therefore, retail sales likely fell 6.1% yoy (sequentially -12.4% qoq annualized) in Q3, consistent with the overall real consumption decline of slightly over 4% yoy. 

Assuming the current trend is maintained in Q4, the economy is probably heading for a full year consumption decline of more than 3% as against the current forecast of -2.6%. In fact, the risk is towards the downside, as the labour market deterioration is expected to accelerate in Q4. The precarious fiscal situation and the resulting pressure to cut the social security spending will bring additional downside risk to the full year consumption forecast. With consumption easily heading for more than a 3% contraction this year, the 2015 growth forecast also looks too optimistic at the moment. 

Furthermore, the above-mentioned factors (fiscal situation and the labour market) and the credit growth deceleration led by high interest rates will also prove to be detrimental to the medium-term consumption outlook. Substantial investment and growth momentum will be needed to reverse the current downward trajectory in private consumption.