Brazil's labour market deterioration adds to balance sheet worries

Brazil's August retail sales and labour market data were worse than expected and point to further downside to the Q3 and 2015 growth forecasts. Labour market deterioration is still in its early stages and is emerging as the most critical downside risk to growth over the medium term. 

Moreover, together with rising interest rates, it could eventually lead to a deterioration in household finances and put pressure on balance sheets in the banking sector. A rise in bad loans would add further stress to the banking sector, particularly in the context of already rising external liabilities.

Given the deteriorating labour market, we are probably heading for a total consumption decline of more than 3% this year translating into an overall contraction of the economy by nearly 3% as against the current forecast of -2.5%.