Brazil: Latest Data Underscore Fragile Economy

Consensus Forecasts

Banco Central do Brazil’s IBC-Br index, which is a gauge of activity in the farming, industry and services sectors (and regarded as a proxy for GDP), rebounded in June but the improvement was still below market expectations. The index rose by a seasonally-adjusted 1.13% over the previous month, partially reversing the downwardly-revised -1.5% posted in May. Compared with the same period a year ago, this translated into a gain of 2.35%. However, economic activity as measured by the index slowed for Q2 as a whole, moderating from 1.1% (q-o-q) in the January-March period to 0.89%. The increase in June was partly boosted by a better performance in the industrial sector which saw output bounce back by 1.9% (m-o-m) in that month, following a decline of 1.8% in May. This translated into an annual gain of 3.1%, thanks to an 18.0% (y-o-y) surge in capital goods output. Industrial activity has remained in the doldrums for much of the past two years and a revival in this beleaguered sector is seen as essential to ensure that the economy’s recovery is on a sustained footing. However, forward indicators have already cast doubts on Brazil’s fragile economic recovery after the latest purchasing managers’ index showed that the services sector barely expanded in July, while manufacturing contracted in the same month. Political uncertainty arising from June’s demonstrations has hit new business. Moreover, manufacturers are facing weak demand at home and abroad, with the protests having dented confidence amongst local consumers. Despite these nationwide street demonstrations, retail sales rose modestly in that month, lifted by expiring tax breaks on household appliances. June retail sales volumes were up 0.5% over the previous month and rose by 1.7% from a year earlier. However, supermarket sales have continued to fall, reflecting the recent rise in food prices which is eroding consumer purchasing power. This year’s forecasts for household consumption have continued to inch lower this month.

Meanwhile, consumer price inflation crept up by just 0.03% (m-o-m) in July which contributed to a slowing in the annual rate to 6.27%. Inflation has now fallen below the 6.5% upper limit of the government’s target range, having breached this level earlier in the year.

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