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Brazil’s strong retail results don’t tell the full story

. Jul 18, 2020
retail Brazilian authorities said economic indicators show the crisis won't be as dramatic as first thought. But it is too early to celebrate. Grocery store in Guarani, Minas Gerais. Photo: Ronaldo Almeida/Shutterstock

In the month of May, we saw the reopening of some economies in some Brazilian states. Even though this process has been carried out gradually, this easing of social isolation measures has been reflected in economic indicators, especially those relating to the retail sector. The results released in May were considerably high, though not enough to cancel out the negative result accrued during the first months of the pandemic. The points to be examined are credit to small and medium-sized enterprises (SMEs), unemployment trends, and the appetite for consumption. After the paralyzation of nearly all trade, the results seen upon reopening ended up being very strong indeed.

</p> <p>To corroborate the strong drop, according to the chart below, the current volume of monthly sales in the retail trade is very close to that of April 2010.</p> <div class="flourish-embed flourish-chart" data-src="visualisation/3208779" data-url="https://flo.uri.sh/visualisation/3208779/embed"><script src="https://public.flourish.studio/resources/embed.js"></script></div> <p>For the month of May, expanded retail trade — which includes construction and vehicle sales — grew 19.6 percent compared to April 2020, but fell 14.9 percent in relation to the same month last year. Therefore, while immediate growth was very significant, it came from a very low baseline. Sales of construction materials increased 22.2 percent and the number of <a href="https://agenciabrasil.ebc.com.br/economia/noticia/2020-06/consumidores-mantem-intencao-de-comprar-veiculos-mesmo-com-crise">new vehicle license plates</a>, according to ANFAVEA, totaled around 130,000.&nbsp;</p> <p>However, these could be backlogged license plates at state traffic departments, finalized when these agencies reopened, as opposed to manufacturers actually making more cars. Added to this, the fall in retail between March and April was very sharp with the almost complete closure of Brazil&#8217;s <a href="https://brazilian.report/newsletters/brazil-daily/2020/06/10/sao-paulo-rio-reopen-supreme-court-fake-news-petrobras-oil/">two main economies</a>, Rio de Janeiro and São Paulo. Even in this scenario, the automobile market could benefit, as people may be more cautious about taking public transportation, turning to cars.</p> <p>The data below shows the sharp drop in sales when compared to last year.</p> <div class="flourish-embed flourish-chart" data-src="visualisation/3125899" data-url="https://flo.uri.sh/visualisation/3125899/embed"><script src="https://public.flourish.studio/resources/embed.js"></script></div> <h2>Is the worst behind us? Only time will tell</h2> <p>With the reopening of economies in Brazil’s states, it is very possible that April represented the low-point of the crisis, and that we should have better numbers from here on out. However, authorities will have to closely monitor the progress of new cases, as if social isolation measures are reinstated, these numbers will certainly worsen once more. This may be proven by a survey conducted by <a href="https://agenciadenoticias.ibge.gov.br/">IBGE</a>, which shows that 18.1 percent of companies had their revenues affected in May, against 28.1 percent in April.&nbsp;</p> <p>Another factor that contributed to these results was the injection of liquidity by the Central Bank, by way of the government&#8217;s emergency aid program and credit for small businesses. However, what we have seen is that the funds for SMEs are now beginning to reach their final destinations, as there has been a greater demand for guarantees from financial institutions. This injection of liquidity into the market seeks to allow companies to take measures instantly and realistically, or even to maintain their survival.&nbsp;</p> <figure class="wp-block-image size-large"><img loading="lazy" width="1000" height="663" src="https://brazilian.report/wp-content/uploads/2020/07/shutterstock_1778398823.jpg" alt="retail pandemic" class="wp-image-44752" srcset="https://brazilian.report/wp-content/uploads/2020/07/shutterstock_1778398823.jpg 1000w, https://brazilian.report/wp-content/uploads/2020/07/shutterstock_1778398823-300x199.jpg 300w, https://brazilian.report/wp-content/uploads/2020/07/shutterstock_1778398823-768x509.jpg 768w, https://brazilian.report/wp-content/uploads/2020/07/shutterstock_1778398823-610x404.jpg 610w" sizes="(max-width: 1000px) 100vw, 1000px" /><figcaption>Closed clothing store with padlock and chains in the door. Photo: Janine Passos/Shutterstock</figcaption></figure> <p>The second point that should be observed is the unemployment rate, which, as expected, is rising. As funds are only now reaching their target, many companies have not had the breathing room to maintain the jobs of their staff. This has not just been the case for SMEs, but also for large companies. Social isolation has been a predominant factor, leading to a drop in the supply and demand relationship. The data that corroborates this is the negative projections of GDP for the end of 2020.&nbsp;</p> <p>Some institutions calculate the fall at <a href="https://brazilian.report/coronavirus-brazil-live-blog/2020/06/10/second-coronavirus-wave-brazilian-gdp-plunge-oecd/">9 or 10 percent</a>, while I predict it will reach 7 percent.</p> <p>Some sectors of the economy have benefited from the pandemic, such as the e-commerce sector which has grown significantly due to social isolation, with many people working from home and forced to buy equipment to adapt.&nbsp;</p> <p>The third point is the appetite for consumption that people still have. If unemployment is taken into account, consumption will certainly continue to fall due to the drop in revenue. This scenario of <a href="https://brazilian.report/business/2020/06/05/brazil-is-reopening-its-economy-tell-that-to-consumers/">lower consumption</a> may also be extended to those who did not have a drop in revenue, as the scenario of uncertainty has led many to hold money back for emergencies. Furthermore, if credit does not reach companies quickly enough, unemployment will be higher and, consequently, consumption will fall further.&nbsp;</p> <p>Therefore, the excellent retail results for May are actually quite misleading. Certainly, with the gradual opening of states’ economies, the easing of isolation, and the arrival of credit at its destination, the results should continue to improve. However, this relies on increases in consumption.

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Marco Harbich

Marco Harbich, CFP, holds a Master's degree in finance. He is CEO and CIO at NEO Finanças Pessoais, and a professor at Mackenzie Presbyterian University, in São Paulo

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