Brazil’s service sector returns to contraction in May after growing in April, PMI falls to 49.2

The Brazilian service sector contracted in May, with output falling after having increased in April for the first time in 26 months. The headline seasonally adjusted IHS Markit Brazil Services PMI Business Activity Index dropped below the critical no-change mark of 50 in May, coming in at 49.2 and thus reversing the rise in output seen in the previous month. Where a reduction was reported, panellists commented on a challenging economic scenario and weakened demand conditions.

Meanwhile, manufacturers registered a third straight rise in production. Furthermore, growth accelerated to a 51-moth peak. This countered the downturn in services and led to a score of 50.4 for the seasonally adjusted IHS Markit Brazil PMI Composite Output Index, the same reading as in April. The figure indicated a marginal rise in private sector activity.

Lower output requirements led to an additional drop in services employment, as companies reportedly looked to lower operating costs. The pace of job losses was strong; however, the weakest in more than two years. Similarly, payroll figures at manufacturers dropped at the slowest rate in the current 27-month period of continuous job shedding.

Average cost burdens at service providers rose again, which panel members attributed to higher prices paid for inputs such as fuel and paper. Furthermore, the pace of inflation accelerated to the most rapid in four months and outstripped the series’ long-run average. Purchasing costs at goods producers rose at a slower rate, one that was the weakest since January 2016.

Amidst attempts to protect margins, service providers passed on to their clients part of the additional cost burden by hiking their own selling prices. The pace of charge inflation was just marginal. Factory gate charges were up at a much rapid rate.

Inflows of new business received by service providers continued to rise, although the upturn lost some momentum. The pace of growth was just slight, having alleviated to the weakest in the current four-month period of growth. Survey participants suggested that the rise in new work was hurt by political uncertainty, tough economic conditions and competitive pressures. By comparison, factory orders rose at the most rapid pace in nearly four-and-a-half years.

There was additional evidence of spare capacity amongst Brazilian services companies as outstanding business volumes fell again. However, the rate of backlog depletion was moderate and the slowest in eight months. A weaker drop in work-in-hand was also recorded in the manufacturing sector.

The sentiment of service providers towards the 12-month outlook rebounded from the recent low of April, though the degree of optimism stayed weaker than the series’ long-run trend. Manufacturers continued to have an optimistic view around growth prospects, and were more positive than their services counterparts.