Brazil Retail Sales Fall Most Since 2008 as Shoppers Pinched

Brazil’s retail sales fell in May by the most in more than three years, as indebted consumers failed to respond to government measures to spur demand. Yields on interest-rate futures fell.

The volume of sales declined 0.8 percent, down from a revised 0.7 percent increase in April, the national statistics agency said today in Rio de Janeiro. The fall was the biggest since November 2008 and surprised all 38 economists surveyed by Bloomberg, whose median estimate was for a rise of 0.6 percent.

President Dilma Rousseff’s government has granted tax breaks for goods including furniture, appliances and automobiles to prop up demand and achieve its latest 2012 growth forecast of 2.5 percent. The May retail sales data opens room for the central bank to further cut borrowing costs today and at future meetings, said Flavio Serrano, senior economist at Banco Espirito Santo de Investimento SA.

“The drop in retail sales and in industrial production, low inflation and the international outlook leave the central bank calm about giving more stimulus,” Serrano said in a phone interview from Sao Paulo.

The yield on interest rate future contracts maturing in January 2014, the most traded in Sao Paulo today, fell six basis points, or 0.06 percentage point, to 7.68 percent at 12:07 p.m. local time. The real strengthened 0.1 percent to 2.0312 per dollar.

Only one analyst surveyed by Bloomberg predicted a decline in monthly retail sales, forecasting a fall of 0.3 percent. Retail sales jumped 8.2 percent from a year ago, less than the median estimate of 10.5 percent from 33 analysts surveyed.

Construction Materials

The broader retail index, which includes the sale of cars and construction materials, rose 4.2 percent from the previous year, the statistics agency said.

Brazil’s consumer default rate in May rose to a 30-month high of 8 percent. Consumer confidence as measured by the National Industry Confederation in June fell 1.75 percent from the prior month and hit its lowest level since September last year.

Latin America’s biggest economy will grow 2.01 percent this year, its second-worst performance since 2003, according to the latest central bank survey. That is slower-than-expected growth in any of the nine largest economies in the Western Hemisphere, according to economists surveyed by Bloomberg.

Labor Market

Brazilian consumers, whose spending has powered growth, have been supported by a strong labor market, even as job creation slows. Unemployment in May was 5.8 percent in May, a record low for the month. The economy created 139,679 jobs in May, 45 percent fewer than a year ago.

Annual inflation slowed to 4.92 percent in June, the slowest pace since September 2010. The central bank targets inflation of 4.5 percent, plus or minus two percentage points.

Sales of automobiles in June increased 16.1 percent from a year ago, according to the Brazilian carmakers’ association known as Anfavea. Improved sales reflected temporary government tax breaks for vehicles aimed at drawing down carmakers’ inventories, Alexandre Barbosa, chief economist at Banco Cooperativo Sicredi, said in an interview from Porto Alegre on July 9.

“This is not a structural measure that will last for the longer term. The automakers will have to adjust,” Barbosa said.

Factory Layoffs

Volvo last week announced layoffs due to the fall in truck sales this year, and the prior week General Motors said it is in talks with unions to reduce its Sao Jose dos Campos plant’s output. Daimler AG’s Mercedes-Benz laid off 1,500 workers at its Sao Bernardo do Campo plant in May because of lower sales.

Confidence among businesses in the retail sector fell 3.7 percent in the three months ending in June from the year before, after declining in May by 2.4 percent, according to figures published by the Getulio Vargas Foundation.

With Brazilian households more indebted, the easy access to credit that consumers have enjoyed is starting to retract, Barbosa said.

“The demand for loans will keep increasing, but not as fast as it did,” Barbosa said. “Banks are a bit concerned with the default rate rising.”

Durable Goods

Consumers will postpone or moderate their purchases of durable goods that require paying in installments, Silvio Sales, an economist the Getulio Vargas Foundation, said in an e-mail on July 9.

Brazil’s central bank has cut the benchmark Selic rate by 400 points since August to a record 8.5 percent and is expected to reduce it by an additional half-point today, according to the latest central bank survey. President Dilma Rousseff has also successfully pushed both public and private banks to lower loan rates.

“At the moment, it seems that consumers have preferred to pay off debts, change to financing at lower rates and maintain the level of consumption in the area of non-durable goods,” Sales said.

Over the next 12 months, 88 percent of Brazilian companies plan to increase their employees’ salaries, according to a report by consulting firm Grant Thornton International Ltd. One quarter of those companies will raise wages above inflation, the report said.

Upper Class

Higher salaries among the upper and upper-middle classes will boost retail sales, said Madeleine Blankenstein, a partner at Grant Thornton Brasil, in a telephone interview from Sao Paulo on July 10. Wage increases for the middle class will not affect retail to the same extent.

“Those people have bought all the cars they could buy, all the furniture they could buy, all the home appliances they could buy, so now they’re going to go for the small consumer products. They might create some volume, but they definitely won’t be so meaningful in relation to growth indexes,” Blankenstein said.

An increase in salaries pushed May supermarket, food, drinks and tobacco sales up 9 percent from last year, the IBGE said in its retail sales statement. The higher volume signals continued demand growth in sectors where consumers do not rely on credit, Solange Srour, chief economist at BNY Mellon ARX Investimentos, said in a telephone interview from Rio de Janeiro.

“It’s a good sign that it’s not a lack of earnings, or lack of employment. It’s a problem of credit,” Srour said.

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