Brazil Weekly Report (Oct-15th)

After holidays on October 11th and 12th, this short week for Brazil had data released on inflation, economic activity and services sector. Let's check it out all of this.

Inflation rises to 10.9 % (YoY) in September

Inflation in September accelerated to 1.2 % MoM (against 0.9% in August), again the main villain of this number were the electricity bills (6.4%), fuels(2%) and food (1.1%). Even though inflation were higher in those items, diffusion index was at 70 %, indicating a more generalised movement. As the economy opens at full, depressed prices for services will start to rise stronger and to add inertia to this movement.

The hydric crisis, a devaluated BRL and the rise of the Brent will keep pressing the prices of electricity and fuel, keeping the inflation high during the last months of the year. We predict inflation closing 2021 at 9.0 %, way bigger than Central Bank target (3.5%).

In order to keep expectations under control, there will be no easy medicine beyond tightening the monetary policy. We expect Central Bank to rise the SELIC rate in 1.25 % on its last meeting in December to 8.25 %. During 2022, there is no indication that Central Bank should stop, it will add at least another hike, rising the SELIC rate to 9 %.

Activity contracts 0.15 % in August

Central Bank Activity index indicates that economy contracted 0.15 % in August. With rising inflations, costs are moving up for industry and agriculture, and reducing the retail trade activity. As economy stagnates grows the risk of a technical recession (two consecutive quarters of contractions).

We believe that activity will remain constrained until the end of year registering near zero growth, this means Brazil will finish the year with 5 % growth of GDP, mostly due to the poor comparison year of 2020.

Services grow 0.5 % in September

Services sector kept its recovery in August, growing 0.5 %, albeit in a slower pace compared to July (+1.08 %). The strongest growth came from the Services provided to families (+4.13%), as vaccination accelerated and Covid-19 infections falls, families opted to increase the consumption of this type of services. Professional, Administrative and Complementary Services contracted in August, generated by a reduction on technical and profissional services (-4.6%), this might indicate that companies in general are requiring less professional services, a bad signal for the whole economy.

As the economy walks towards the "new-normal", human contact services might still warrants positives rates of growth for the services sector, however, we believe that families services will not recover its full capacity until the end of the year, as inflation picked up to 10,9 % and salaries kept stagnated. Moreover, we are yet to see how the "new normal" will transform the services sector. It is quite possible that the demand for certain type of services might change permanently, changing the dynamics of this sector.

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