Friday, 13 March 2009

Brazil Retail Surged; Hey, Slow it Down -- Consumers Have Longer Lagtime to Trim Spending During Crisis

The government reported today that January retail sales in volume terms increased 1.4 percent on a seasonally-adjusted, month on month basis, and 6 percent year-over-year. According to a Bloomberg survey, it was about twice as fast the increase expected by a survey of economists. In general, analysts were expecting January retail sales in volume terms to post a 0.2 percent decline month-on-month and a 2.7 percent increase on a year-on-year basis.

While this might mislead people by telling the downturn in the retail industry was not as bad as initially expected, we have to remember that the process of adjustment in the industry tends to be quicker than with consumers. I don't know where I read this a few days ago (probably it was from ING Bank's Zeina Latif) that the lagtime for consumers to slow demand tends to be close to six months, and for companies to be less than three months. Some investors, on the other hand, might expect the central bank to be more careful when cutting interest rates. We don't think so -- we insist on our call, that the bank will be pressured to keep cutting rates by large amounts so the Selic target might be below 10 percent before June.

The risk of inflation spiking is big, but, who cares? Activity is plunging, confidence remains very weak and the president thinks he will be able to avert a recession. Expect more political noise, little congressional action and more unreasonable government spending events (that on the political risk side) in coming months.

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