Brazil's supply-side economy likely contracted by -0.7% mom in May

On the demand side, Brazil's retail sales data released for April and May suggests that consumption is set to contract in Q2 as well. Therefore, Societe Generale expects the consumption to be a net drag on growth for the first time in a long time on a full-year basis (expecting -0.9% consumption growth in 2015). The sharp decline in industrial production (-8.9% yoy) leads us to project an overall supplyside contraction of -3.7% yoy in May. 

"The economy likely also contracted heavily in May on a sequential basis, implying growth in Q2 will likely be considerably worse than in Q1 - consistent with our forecast of a -7.9% qoq (annualised rate) contraction in Q2", says SocGen.

The weakening labour market and lower social security spending are already hurting consumption growth this year while private investment will continue to subtract from GDP. Finally, public spending is set to contribute negatively to demand growth in H2 as the effects from the announced spending freeze of BRL69bn comes into play. 

The surge in real exports growth on the back of BRL depreciation and the resulting gain in net exports are likely to be the only positive factor contributing to growth in 2015. However, it is unclear at this stage whether the improvement in net exports will help increase investment momentum, particularly when other segments of demand remain so weak. Brazil economy is likely to grow at -1.6% in 2015, whereas, a small recovery expected in 2016, estimates Societe Generale.