Brazil's retail sales rise sequentially in August but continue to fall yoy

Brazil's retail sales fell 3.5% yoy in Q2 following the 0.8% yoy decline in Q1. The same pace of decline continued in July as well - and the sequential contraction in sales means consumption will continue to be a significant drag to growth in Q3 despite the assumption that retail sales likely grew 0.8% mom in August (-3.7% yoy). As the factors leading to the sales decline - rising unemployment, efforts to cut fiscal spending and higher inflation - have remained in place, the decline is expected to continue over the next few months. In fact, the balance of risk to the consumption forecasts is tilted to the downside. 

In recent quarters, growth in retail sales and private consumption has decelerated sharply compared with the normal growth of 6.3% and 3.9% seen during 2012-13 (and much worse compared with the cyclical peaks of 8.8% and 5.6% observed in 2010-11). Unfortunately, the shape and outlook of the labour market in particular and the overall economy in general, offer little hope of a near- to medium-term revival in consumption. In fact, the labour market is expected to continue deteriorating over the next few quarters and this is bound to hit wage growth, income and private consumption. 

Further to this, the government's drive towards fiscal austerity will also hurt consumption growth in the next few quarters. Substantial investment and growth momentum will be needed to reverse the current downward trajectory in private consumption.