Brazil Retail Sales Accelerated in July

The rate of increase in Brazil's retail sales accelerated again in July, indicating t that sustained domestic demand may well allow Latin America's largest economy to weather the fall in commodity prices rather better than expected. Retail sales were up an inflation corrected 11 percent in July, following a revised 8.2 percent increase in June. Sales rose in June at the slowest pace in 14 months, according to data from the national statistics agency.



Evidently domestic demand is still robust and four central bank interest rate increases since April have far from throttled Brazilian domestic demand, which had been contributing to the upward movement in annual inflation - to around 6.5% - well above the mid-point of the central bank's target range (4.5 percent plus or minus 2 percentage points), but still significantly below the levels seen in some emerging market economies (especially in Eastern Europe).

At the same time we need to exercise a certain amount of caution in interpreting this data. Month on month retail sales fell 0.2 percent in July from June, and this was the first drop in five months. Thus in part the acceleration in July is due to base effects from 2007. On the other hand, when cars and construction materials are added-in, retail sales were up 1 percent from June.

Vehicle sales rose 4 percent in August from August 2007, and this was the slowest pace in almost two years. The slowdown in car sales is being widely attributed to the impact of interest rate rises on car loan rates.



The prospect of sustained consumer spending against the backdrop of slower growth overseas and lower commodity prices suggests that the economy is far from the oft predicted growth slump, and that the central bank may well use the dramatic fall in oil and other commodity prices as a pretext for moving forward prudently on the borrowing costs front.


The central bank last week raised the Selic rate to 13.75 percent (up from 13 percent), in an attempt to cool demand and slow inflation. Most economists expect policy makers to raise rates further - to 14.75 percent perhaps - by year-end, but looking at the financial turmoil of recent weeks (which has its origin in developed and not emerging economy issues) I can't help feeling prudence (and a more watch and wait approach) may now be called for.

Brazil's Finance Minister Guido Mantega yesterday said that the turmoil in U.S. credit markets would slow Brazil's economic growth to about 4.5 percent in 2009 from 5-to-5.5 percent this year. This is all hard to quantify at this point. But the central argument he was making - that the Wall Street crisis won't stop Brazil from expanding - seems extremely valid to me. He is quoted as saying that under "other circumstances, Brazil would be on its knees right now", and again I cannot help agreeing, and I also don't understand why so many analysts seem to have so much difficulty getting hold of what is happening. We still seem to be in the world of knee-jerk reactions.