Brazilian Retail Sales Unexpectedly Contracted in December

Brazil’s retail sales unexpectedly contracted in December, the first monthly drop since May, prompting traders to pare bets that the central bank will raise rates in the first half of this year.

The volume of sales declined 0.5 percent, after increasing 0.3 percent in November, the national statistics agency said today in Rio de Janeiro. The median estimate from 31 economists surveyed by Bloomberg was for sales to gain 0.8 percent, and the lowest forecast was for a 0.2 percent rise. From the year earlier, sales increased 5 percent, as compared to a 7.3 percent forecast from 29 economists surveyed.

The fall in retail sales reflects rising inflation that is crimping consumers, said Luciano Rostagno, chief strategist at Banco WestLB do Brasil. In an effort to spur expansion, President Dilma Rousseff has granted tax breaks for consumer goods and pressured banks to lower borrowing costs, while the central bank has kept its benchmark rate at a record low 7.25 percent since October. With industrial production and exports falling last year, the measures thus far have failed to spur the slowest growth among major emerging markets.

Growth Model

“Brazil’s growth model based on stimulating consumption has reached its limit,” said Rostagno in a telephone interview from Sao Paulo. “This year, the government is going to have to spur investments in both the private and public sector to make the economy grow at a stronger rate, and not disappoint as it did in the last two years.”

Brazil’s gross domestic product expanded 1 percent in 2012, the central bank estimates, down from 2.7 percent in 2011 and 7.5 percent in 2010.

Swap rates on the contract maturing in January 2014, the most traded in Sao Paulo, fell eight basis points, or 0.08 percentage point, to 7.65 percent at 10:17 a.m. local time. The real strengthened 0.2 percent to 1.9602 per dollar.

Inflation as measured by the IPCA index accelerated to 6.15 percent in 2012, and has been above the 4.5 percent mid-point of the central bank’s target range since September 2010.

Traders are betting the central bank may boost the Selic rate as early as April. In the minutes to their Jan. 15-16 meeting, policy makers said that the best path to cooling inflation without jeopardizing growth is to keep the benchmark rate at its present level for a “sufficiently prolonged period.”

Lower Forecasts

Andre Perfeito, chief economist at Gradual Investimentos, said he would trim his fourth quarter GDP forecast to 0.65 percent from 0.7 percent based on the retail sales figure. He estimates 0.9 percent growth for 2012. The number will be released next week.

Domestic demand “can’t grow at the same pace as we saw in previous years,” Perfeito said by phone from Sao Paulo. “We’re going to see an accommodation of demand. And that’s not bad, it can help control the inflation to some extent.”

Analysts covering Brazil have increased 2013 inflation forecasts while cutting growth estimates for six of the last seven weeks, according to the latest central bank survey. Economists predicted inflation of 5.70 percent this year and growth of 3.08 percent, compared with 5.47 percent and 3.30 percent at the end of December, respectively.

Sales of electronics and telecom equipment fell 15.5 percent, while supermarket sales, food and beverages slid 0.3 percent in December, the agency said. Purchases of items for personal and domestic use fell 4.1 percent in December after rising 4.7 percent the prior month.

The broader retail index, which includes the sale of cars and construction materials, rose 5 percent from the previous year, the statistics agency said.

Finance Minister Guido Mantega announced on Dec. 19 that retailers, excluding supermarkets, will be exempt from payroll taxes starting in April. He also extended IPI tax cuts on some consumer goods through June, though at lower levels.

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