Brazil’s once-booming economy has started toreveal chinks in its armor, with recent declines in wages, retails sales andindustrial production the first signs of weakness that could help bringinflation under control.
While the unemployment rate in six of Brazil’s largest cities was steady at6.0% for a third-consecutive month in September, average monthly salaries fellfor the first time in four months, the Brazilian Geographic and StatisticsInstitute, or IBGE, said Thursday. The wage downturn followed August’s 0.4%decline in retail sales and 0.2% slide in industrial production.
The latest economic data should help bolster the credibility of the BrazilianCentral Bank, which faced heavy criticism from economists and market analystsafter a surprise interest-rate cut in August. The bank made a pre-emptive moveto slash rates in order to avoid any local impact from the debt crisis in Europeand sluggish global growth. But the decision came at a time when inflation waswell above target.
Central bankers, who have since implemented a second reduction to bring thebenchmark Selic interest rate down to 11.5%, now seem prescient. While still tooearly to be considered a trend, the latest figures indicate that recent shockscould start to affect once-heated domestic demand, economists at BarclaysCapital said.
“There is growing anxiety that the slowdown expected for [the third quarter]could be spilling over to [the fourth quarter] and that real [gross domesticproduct] growth could surprise on the downside,” Barclays said.
Most economists expect at least one more interest-rate cut this year tosupport growth, but there is a debate about further reductions into 2012.Minutes from the central bank’s Oct. 19 meeting, released earlier Thursday,indicated the central bankers were focused on boosting activity.
The outlook for the global economy worsened between the bank’s August andOctober meetings, with the global slowdown undercutting domestic growth, thecentral bankers said. That should also cause a decline in inflation, starting inthe fourth quarter of 2011. The central bank expects inflation to fall to thegovernment’s 4.5% target in 2012.
Inflationary pressures have shown signs of easing in recent weeks, withconsumer prices advancing at an annual rate of 7.12% through mid-October, downfrom 7.33% at the end of September. But that is still well above thegovernment’s target range for inflation of 4.5% plus or minus two percentagepoints. And, despite the central bank’s belief that inflation will slow, foodprices–which carry the heaviest weighting in Brazil’s inflation survey–typically see a seasonal advance at the end of each year.
Record low unemployment, higher wages and greater access to consumer creditsent Brazilians on the buying spree that caused inflation to surge earlier thisyear. With wages falling in September and a slower pace of job creation,consumers might reconsider spending, and that could help the central bank’scause, said Alfredo Coutino of Moody’s Analytics.
“The slow advance in employment will continue to pose a toll on consumptiondecisions; however, it will help reduce demand pressures on prices and bringinflation down,” Coutino said.
By Jeff Fick, Dow Jones Newswires