Brazil's consumption deterioration likely to continue on rising unemployment

Brazil retail sales fell 3.5% yoy in Q2 following 0.8% yoy decline in Q1. In sequential terms, and with the seasonally-adjusted data, retail sales fell at the pace of -7.8% qoq annualized in Q1 and -8.3% in Q2. As the factors leading to the sales decline, rising unemployment, efforts to cut fiscal spending and higher inflation, have remained in place, we expect the decline to continue over next few months. 

"In July, retail sales are expected to post -2.6% yoy (-0.4% mom) which would be consistent with yet another significant quarterly decline in overall consumption spending. In recent quarters, growth in retail sales and private consumption has decelerated sharply compared with normal growth of 6.3% and 3.9% seen during 2012-13", says Societe Generale. 

Unfortunately, the shape and outlook of the labor market in particular and the overall economy in general offer little hope of a near- to medium-term revival in consumption. In fact, the labor market is expected to continue deteriorating over the next few quarters and this is bound to hit wage growth, inco me and private consumption. 

"Further to this, the government's drive towards fiscal austerity will also hurt consumption growth in the next few quarters. Substantial investment and growth momentum will be needed to reverse the current downward trajectory in private consumption", added Societe Generale.