Retail Slumps with Consumer Confidence

By Lucy Jordan, Senior Contributing Reporter

BRASÍLIA, BRAZIL – Retail sales in Brazil have seen their first annual drop in almost a decade, prompting debate about whether Brazil’s consumer boom – the engine behind its economic growth for the past ten years – is finally coming to a halt.

Retail sales contracted by 0.2 percent year-on-year in February, according to IBGE, the national statistics agency. Supermarket sales dropped by 1 percent, while personal and household items saw a 2.9 percent decline in sales.

Chief Emerging Markets Economist Neil Shearing for Capital Economics said in a Latin America Economics Update that he was optimistic that this retail sales data had overstated the weakness of consumer spending, citing the fact that February 2013 had one fewer day than February 2012, a leap year, and that the retail sales figures are relatively narrow – for example, they exclude car sales.

“Nonetheless,” he said, “even taking into account these factors, it does seem … that Brazil’s consumer boom has lost some of its gloss.”

The contraction in consumer spending is likely to be partly due to a jump in inflation, which has been increasing since mid-2012. Consumers have been feeling the strain, and Brazilians are particularly sensitive to inflation, as they remember the skyrocketing inflation rates of the 1990s, when rates that reached 2,500 percent meant salaries could become useless within days.

“Inflation is surely one of the reasons that consumption has slowed down because a growing part of the income is already absorbed by the spending for basic consumption such as for food, transport and homes,” said Anthony Mueller, Professor of economics at the Federal University of Sergipe. “In a macroeconomic perspective, the end of the consumption boom is a necessary condition that inflation will come down.”

Inflation caused particular concern during March and April, when it combined with a bad harvest to drive up prices of some foods, causing tomatoes, at three-fold their normal seasonal price, to become a symbol of consumer dissatisfaction. Inflation hit 6.59 percent in March, tipping the Central Bank’s target of 4.5 percent with a margin of plus or minus two percent.

Consumer debt, a significant driver of Brazil’s growth over the past decade, could also be reaching a tipping point, experts say.

“There is growing evidence that a decade-long credit boom is fizzling out. Vehicle lending grew by forty percent in 2011 but is now growing at just 5 percent [year-on-year]. Household debt servicing costs are extremely high by international standards and, while last year’s rise in loan defaults appears to have stabilized, banks are becoming more cautious,” said Shearer. “As credit growth has slowed, Brazil’s supposedly irrepressible consumers have become less confident – consumer confidence fell to a 21-month low in April.”

Much of Brazil’s consumer boom has been attributed to a swelling middle class with increased access to credit, encouraged to spend by a government seeking to boost faltering growth through consumption. However, last year record figures from Serasa Experian Consultancy showed that 5.5 million more Brazilians defaulted on their debts between January and October 2012.

“Economic growth fueled mainly by consumption will run out of steam when indebtedness reaches its limit, which seems to be the case right now,” said Professor Mueller. “The big macroeconomic challenge ahead for Brazil is to recalibrate economic activity towards more investment in order to compensate for less consumption.”

“It would be a big error if the government should try to stimulate consumption now. In order to avoid a recession, more consumption is not the cure. What the country needs is not more consumption but more investment,” he added.