Brazil’s 2016 consumption growth prospect faces considerable downside risk

Brazil's retail sales is expected to register first quarterly growth in four quarters in Q4, after rising 0.46% m/m in October and 1.47% m/m in November. The growth in Q4 is expected to be limited mainly because of lower sales growth in December on both a trend and sequential basis.

"Nevertheless, the quarterly sales growth estimate of -6.7% yoy is broadly consistent with our Q4 consumption growth estimate of -4.9% yoy (3.9% qoq at an annualised rate). On our forecast, therefore, consumption contracted by -3.6% in 2015, contributing to the sharp overall economic contraction estimated at -3.7%", says Societe Generale.

Investor confidence is likely to remain low for several reasons including political, domestic, external and economic. Meanwhile, the government's finances are increasingly delicate at a time when there is a requirement for counter-cyclical fiscal spending is huge. Decline in labor market is expected to continue in this situation over the next few months. This will in turn impact wage growth and disposable income. Furthermore, the fiscal compulsion has began impacting social security spending, whereas monetary tightening and increasing joblessness is affecting credit growth.

Lastly, high inflation has also been a major factor in lowering consumption spending. Consumption is likely to remain in bad shape due to the above mentioned factors.

"In fact, we continue to see considerable downside risk to our 2016 consumption growth forecast of -3.3%. Substantial investment and growth momentum will be needed to reverse the current downward trajectory in private consumption", says Societe Generale.