Tuesday, 16 December 2008

Do the Awful Job Data Readings in Sao Paulo Mean that Brazil is Nearing a Recession?

Today, the Sao Paulo State's Federation of Industrialists (FIESP) unveiled the industrial job figures for November 2008 in the most populous state in Brazil. The numbers were awful: 34,000 workers lost their jobs in Sao Paulo last month, following October's 10,000 dismissals. Fiesp said that out of 21 sectors surveyed, 14 fired staff, two kept the same amount of workers and only five hired new employees (Click here to read Fiesp's press note in Portuguese language.)

The bad news didn't stop there. The confidence survey by Fiesp showed that for the first time, business confidence fell below 40 points. Two-thirds of the executives surveyed said that credit dried up and eight in every ten said they were hit by a surge in borrowing costs. And Fiesp warns: ``The crisis is just beginning to unfold.'' Is the Brazilian entrepreneur panicking out?

I wouldn't say yes, even as very few people are actually betting on a downturn. Morgan Stanley economist Marcelo Carvalho is one of the few Brazil analysts saying that the economy is on the brink of a recession. He predicts zero growth next year, down from his prior forecast (which he emphasises was below market-consensus) of 2 percent. He argues that in previous occasions, the Brazilian economy experienced serious and quick downturns -- such as during the Mexico crisis, when growth slowed from 8.5 percent to zero in the space of just four quarters!

There are reasons to believe that Brazil is nearing a violent slowdown -- and proof of that is the government's decisive plan of action (we like it or not.) Carvalho foresees 200 basis points of rate cuts starting next month. The BNDES pledged to lend a record 110 billion reais next year (the problem is, would there be enough borrowers interested in raising money? for what investment projects?) 

For those who invest, stay in bonds. If interest rates drop dramatically (and now that inflation is finally giving signs of relief), the appeal of fixed-income will be, adding the safety of these investments, unbeatable along 2009. Stocks might be cheap but, with an economy growing zero and exports almost dead, the expectations of corporate profits should be nothing but disappointing.    

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