Brazil’s economy facing challenging outlook

Brazil's industrial production index posted 0.6% m/m sa growth in May, the trend remains fragile. The country's headline growth was driven by non-durable consumption and capital goods production, but auto intermediate goods production was negative. 

According to Barclays, "We think May's positive growth will prove fleeting as all leading indicators remain fairly weak, especially business confidence, which continues to drop to historically low levels. Moreover, the outlook for the automotive sector remains fairly bleak, and our preliminary forecast for June industrial production is a drop of 1.2% m/m sa."

Brazil's economy is still facing a challenging outlook. Consumption is still following downward trend. Retail sales contracted by 0.9 m/m sa and -4.5% y/y, mainly on declining sales in the supermarket, furniture, auto, and construction material categories. The broad retail sales index posted an even larger contraction, of 1.8% m/m sa. 

Labor market deterioration should continue for the next few quarters, and the fall in real disposable income this year expected to drive household consumption to contract by 1.2% in 2015, added Barclays. Moreover, consumer sentiment remains in the doldrums, and the tightening of monetary conditions does not support the credit market. 

"Overall, a strong downside risks to our Q2 real GDP forecast of -0.7% q/q sa is seen. Furthermore, we see a risk that the drag carried through to Q3 will be larger than we anticipated: we forecast a 0.4% contraction in Q3, but leading indicators so far suggest a potentially larger contraction. Our current GDP growth forecast for 2015 is -1.1%", estimates Barclays.