Last Christmas, you could not have moved on Rua Vinte Cinco de Março, the busy market street in São Paulo, so crowded was it with festive season shoppers. Indeed, it seemed all of Brazil was out shopping last year.
So it may come as a surprise then that retail sales in Brazil in December were below expectations. Instead of the monthly increase of 0.8 per cent forecast by the market compared with November, retail sales rose only 0.5 per cent.
This caught analysts off guard and it’s probably safe to say, President Dilma Rousseff’s economic team as well. If the weaker trend persists – a big “if” because it is only one month of data – it would further confuse a macro-economic picture that is already looking muddy.
With inflation high at 6.15 per cent in January, there is speculation that the government may increase interest rates earlier than expected, perhaps during the first half of this year, to try to dampen prices.
Bloomberg quoted Alexandre Tombini, central bank president, as saying on Tuesday:
When necessary, if supported by the prospective scenario for inflation, the posture of the central bank in relation to monetary policy will be adequately adjusted.
But any rate rise would presumably deter consumption, which presently is the only engine driving the economy.
This from Goldman Sachs:
Despite the slight loss of momentum during fourth quarter 2012, the retail sector remains one of the most dynamic sectors in the economy, with demand supported by strong labour market conditions, moderate credit flows, tax benefits geared to the purchase of durable goods, and relatively resilient consumer confidence.
On the other hand, some analysts are warning that with or without a rate increase, Brazil cannot continue consuming at this pace. They say that December could mark the first hiccup in what has been a secular upwards trend in consumption in Brazil.
This from Capital Economics:
We continue to believe that the pace of consumer spending growth in Brazil is unsustainable. Real wages cannot continue to increase ahead of productivity forever. At the same time, the rapid expansion of consumer credit is unsustainable. We could be witnessing the end of Brazil’s multi-year consumer boom, but it would be foolish to leap to such a conclusion on the basis of one month’s weak sales data.
So for the government, any sustained slowdown in retail sales will only add to the jigsaw puzzle that the Brazilian economy has become. Added to the mix of high inflation and low growth would be softening domestic consumption.
Clearly, these are hardly the textbook ingredients for growth. The government will have to speed up efforts to fire up that other engine of the economy, investment.
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