Between 2006 and 2012, retail sales in Brazil grew about 90%. In other words, retail almost doubled in size in less than a decade.

Last December, retail sales fell by 0.5% m/m, but it’s important to remember that this follows a period of strong growth – in the previous six months sales had increased by an average of 0.7% m/m.

Despite the surprise fall in retail sales in December, Brazilian consumer spending growth appears to have been strong in the final quarter of last year. The problem, according to Capital Economics’ Neil Shearing, is that with local producers either facing capacity constraints or struggling to compete against cheap imports, “the boost to GDP is likely to be limited”.

Here is what Mr. Shearing had to say about the subject:

“To be absolutely clear, we continue to believe that the pace of consumer spending growth in Brazil is unsustainable. Real wages cannot continue to increase ahead of productivity forever. At the same time, the rapid expansion of consumer credit is unsustainable. We could be witnessing the end of Brazil’s multi-year consumer boom, but it would be foolish to leap to such a conclusion on the basis of one month’s weak sales data.”

And he went on to explain why:

“The more pressing concern is that while consumer demand seems to have been strong in the final quarter of the year as a whole, this appears to have been of limited benefit to Brazilian producers.

“This reflects the fact that Brazilian producers are still struggling to compete against cheap imports. An overvalued currency is part of the problem. But low rates of investment are also an issue.”

“All told, we’ve pencilled in growth of about 1% in 2012 as a whole.”

And he finishes with a warning:

“Relying on a stronger currency to tame domestic price pressures will weigh further on external competitiveness and add to the headwinds facing Brazil’s economy.”

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