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Brazilian services activity contracts in August, PMI index falls to 46.8

Brazilian services activity contracted in August after having expanded in July. The seasonally adjusted IHS Markit Services Business Activity Index dropped to 46.8 in the month from July’s 50.4, hinted at a renewed fall in output. The figure for August is the lowest since February 2017 and indicates a strong pace of contraction. Panel members stated that the downturn reflected fierce competition, political issues and subdued underlying demand.

Manufacturing continued to be in expansion mode, with the upturn strengthening from July. Nevertheless, the rise was not enough to counter the downturn in services, which weighed on private sector output back into contraction. The seasonally adjusted IHS Markit Brazil Composite PMI Output Index fell to 47.8 in August, the second-lowest figure in one-and-a-half years.

New order receipts at services companies rose midway through the third quarter, but only marginally and at the second-slowest rate in the current eight-month period of growth. Firms that recorded new business gains commented on advertising attempts and expanded client bases. Those that experienced reduction cited competitive conditions, weak demand, low investments and political crisis. By comparison, factory orders rose at the most rapid rate since April.

Brazilian service providers made additional inroads into their backlogs amidst reports of excess capacity arising from a lack of new business. The fall in outstanding workloads was sharp and the most pronounced since May. Similarly, unfinished business in the manufacturing industry declined again.

The reduction in service sector backlogs was gain achieved despite job shedding. Employment has decreased throughout the past three-and-a-half years, with the pace of contraction seen in August the joint-fastest since April 2017. Where workforce numbers dropped, panelists commented on cost-cutting initiatives and subdued underlying demand. Manufacturing jobs likewise declined, though only marginally.

In spite of weakening from July, the pace of input cost inflation at services companies remained elevated by historical standards. Anecdotal evidence highlighted higher food, fuel, tyre and salary costs. There were also reports of greater tax burdens and currency weakness. In the manufacturing economy, purchasing price inflation rose to a ten-year peak.

Service providers raised their own selling prices again. The rate of charge inflation remained above its long-run average but eased from July and was moderate. Factory gate prices also increased at a slower rate, but one that nevertheless remained elevated in the context of survey data.

Business sentiment among service providers strengthened in August, with panelists predicting better growth prospects after the presidential elections. Restructuring plans, investments, advertising and forecasts of demand improvements were also factors boosting optimism. Meanwhile, goods producers were at their most upbeat since April.

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