Contraction in Brazil’s retail sales likely moderated in June; consumption growth unlikely to recover soon

Contraction in Brazil’s retail sales is expected to have moderated slightly in the month of June. After the recovery in February from a severe drop in December and January, retail sales had resumed their downward path, shrinking 7.2 percent year-on-year on average in the past three months. The pace of contraction is expected to have slowed slightly in June. According to a Societe Generale research report, retail sales are likely to have shrunk 0.4 percent on sequential basis and 6.4 percent on year-on-year basis, given the sharp rise in consumer sentiment.

However, given that the deterioration in the labor market is likely to continue due to the economic contraction, there is very little possibility that this trend would reverse significantly in the near term. The current rate of contraction in sales is in line with the overall personal consumption spending declining at a rate of around 5 percent annually.

Investor confidence continues to be quite weak in spite of recent improvement after the administrative changes and the increase in commodity prices.  In this scenario, the labor market is likely to continue worsening in the near term to medium term, which will affect the disposable income and wage growth, stated Societe Generale.

Furthermore, the fiscal compulsion would impact social security spending whereas rising joblessness would affect credit demand growth. High inflation has also been a huge factor behind the drop in real consumption spending. These factors are expected to continue to be a drag on consumption.

“We expect overall consumption to contract by 5.0 percent in 2016, and again by 2.8 percent in 2017,” added Societe Generale.

Significant investment and growth momentum would be required to reverse the current downward path in private consumption.