Saturday, May 30, 2015

Brasilians Cut Back As Downturn Hits Home

May 29, 2015 5:03 pm

Brazilians cut back as downturn hits home

Shoppers walk with their bags at a market in Rio de Janeiro, Brazil, on Tuesday, July 8, 2014. Consumer prices as measured by the benchmark IPCA index rose 0.4 percent in Brazil in June, pushing annual inflation to 6.52 percent, the national statistics agency said today. Photographer: Dado Galdieri/Bloomberg©Bloomberg
Brazilian families have cut spending on a yearly basis for the first time in more than a decade as a toxic combination of high inflation and rising unemployment begins to hit at the heart of Brazil’s economy.
Household consumption fell 0.9 per cent in the first quarter from the same period of 2014 — the first annual decline since the third quarter of 2003, according to gross domestic product figures from Brazil’s national statistics office (IBGE) on Friday. It was the worst quarter-on-quarter decline since the depths of the global financial crisis in 2008.
Brazil’s consumers have driven economic growth ever since President Dilma Rousseff’s Workers’ Party (PT) took power in 2003, turning the country into one of the world’s most desirable emerging markets among investors and helping to keep the PT in power ever since.
However, this consumption-led model of growth has neared exhaustion over recent years, with Friday’s data providing the most convincing evidence yet of the need to shift Brazil’s focus to investment and structural reforms, analysts said.
Overall, Brazil’s economy contracted 0.2 per cent in the first quarter from the previous one — a better than expected headline number, but largely because of a 4.7 per cent growth in agriculture and higher exports, aided by a weaker currency.
“The report is definitely much, much weaker than the headline suggests,” said Alberto Ramos, economist with Goldman Sachs. “All the main components of domestic demand recorded annualised rates of contraction,” he said.
Brazil’s services sector declined 1.2 per cent in the first quarter from the previous year, while industry, which has long suffered from poor infrastructure and growing state interventionism under the PT, fell 3 per cent on a yearly basis.
However, after winning re-election by one of the narrowest margins on record in last October’s presidential elections, Ms Rousseff has backed a series of measures to put the economy on a path to more sustainable growth.

The battle of Brazil’s budget is far from won
Brazilian Minister of Finance Joaquim Levy is hounded by journalists upon arrival at the National Congress in Brasilia to meet the Senate's President Renan Calheiros to seek support in Congress for the approval of the fiscal adjustment, on March 30, 2015. AFP PHOTO/EVARISTO SA (Photo credit should read EVARISTO SA/AFP/Getty Images)
It has been a big week in the battle of Brazil’s budget. Three strategically important cost-cutting measures were approved in Congress which should go some way to achieving a primary budget surplus equal to 1.2 per cent of GDP. Nevertheless, finance minister Joaquim Levy faces a tough campaign in which success is far from guaranteed.
Joaquim Levy, Brazil’s new market-friendly finance minister, led efforts to pass three major cost-cutting measures this week in Congress to help restore the country’s public finances, restricting unemployment and pension benefits and raising taxes on imported goods.
Meanwhile, the central bank has lifted interest rates to the highest level in six years to tackle inflation that has climbed above 8 per cent.
The return to more orthodox economic policies has pleased investors and raised hopes for a better 2016. However, gross domestic product is still expected to contract over 1.2 per cent this year as the austerity measures hit Brazil’s already stagnant economy, marking the country’s deepest recession since 1990, according to World Bank figures.
This week Brazil’s planning ministry estimated this year’s GDP at about $1.8tn — a contraction of almost one quarter in dollar terms from last year, also as a result of Brazil’s plunging currency.
Rising unemployment is expected to put further pressure on household spending in the months ahead, hurting Ms Rousseff’s already low approval ratings and testing her resolve to continue with the austerity programme.
Data last week showed Brazil’s economy lost jobs in April for the first time for that month since records began in 1992, while the country’s unemployment rate reached 6.4 per cent — its highest level in four years.