Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Brazil retail sales: The worst is yet to come
Christopher Dembik
Head of Macroeconomic Research
Summary: This afternoon, we are looking at Emerging Markets, and especially Brazil. Retail sales at constant prices in Latin America's largest economy are out at minus 1.3% YoY in March. This is the worst print since the 2015-16 recession. We expect a double-digit decrease in retail sales in April due to the spread of the virus and the implementation of lockdown measures at state-level.
The “measly cold”, as it was characterized by president Jair Bolsonaro, is starting to hit hard the Brazilian economy. Even before the outbreak really began to spread in Brazil, retail sales were weak on the back of the sluggish economic recovery. In March, the headline was out at minus 1.3% YoY – the worst level since the 2015-16 recession. Looking into further details, food sales by hypermarkets and supermarkets jumped by 11.1% YoY – a similar positive trend has been seen in almost every other country affected by the coronavirus. The other sales have significantly dropped with textiles and clothes sales experiencing the biggest drop on record at minus 39.6% YoY, and computer and communications equipment sales falling minus 23.2% YoY.
These figures are horrific, but it will get worse in the coming months as the impact of the coronavirus on the broad economy will become more visible. The recent release of vehicles sales in April, at minus 77.3% - an historically unprecedented plunge – gives us a clue of what is coming ahead.
Compared to the rest of the world, Brazil was affected very late by the coronavirus pandemic. The first cases identified by the WTO date back to the beginning of March, but it was not until April that the pandemic began to spread rapidly across the country to reach more than 162,000 confirmed cases as of today. The country has not managed to flatten the coronavirus curve yet, which means that the health crisis is likely to worsen in the coming months, especially due to the president’s reluctancy to implement lockdown measures. The government has been slow to take the right measures, questioning publicly the merits of lockdown and asking Brazilians to get back to work. Fortunately, in April, some states have decided to act to contain the spread but, as it is still insufficient, we have seen over the past few days major Brazilian cities, such as São Luis and Fortaleza, implementing stricter rules and forbidding people from going outside except to obtain groceries or medications.
These necessary measures will have a major impact on the economy at least until the end of Q2. There is a high 0.90 correlation out of one between retail trade confidence (published by the Getulio Vargas Foundation) and retail sales. Therefore, we expect that retail sales will likely drop by a double-digit in April on the back of higher pain from coronavirus outbreak. Data for April is due on June 16. There is no question but that that Brazil has probably entered its worst recession since independence in 1822.
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