Brazil 2022 Consumer Outlook: Consumer Confidence Positive Despite Prevailing Headwinds

Fitch Solutions / Consumer & Retail / Brazil / Tue 12 Jul, 2022

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Key View

  • We expect real household spending in Brazil to grow by 1.3% y-o-y in 2022, with the consumer recovery weighed down by high, rising inflation, even as the effects of the Covid-19 pandemic begin to fade.

  • High inflation will be the main downward pressure for household spending in 2022. Other risks include low real wage growth and the possibility of new Covid-19 variants, which could lead to the re-imposition of Covid-19-related restrictions of supply-chain issues.

Outlook For 2022 And 2023

Real household spending in Brazil will grow to 1.5% y-o-y in 2023, up from 1.3% in 2022. Near-term household spending will experience headwinds as a result of elevated inflation, continued interest rate hikes and policy uncertainty in the country. We forecast real total household spending to grow from BRL2.8trn in 2022 to BRL2.9trn in 2023.

Real Household Spending Recovery Distorted By Inflationary Pressures

Brazil -Total Household Spending, Real % y-o-y (2019-2026)

e/f = Fitch Solutions estimate/forecast. Source: Local sources, Fitch Solutions

High-Frequency Data: Retail Sales To Grow As Consumer Confidence Remains Positive

We forecast sustained growth in consumer spending, as consumer confidence remains relatively stable and retail sales steadily recover following a 6.8% y-o-y contraction in October 2021. In April 2022, retail sales grew 4.5% y-o-y, improving from the 4.0% y-o-y in March 2022. Although the rate of growth in retail sales is significantly lower than its preceding annual growth rate of 15.9% in April 2021, a recovery in consumer confidence is evident and tracking a consistent uptick. The consumer confidence index remains stable at 79.0 in June 2022, just under its comparative score of 80.9 in June 2021. This continued recovery in consumer confidence will support consumers’ willingness and ability to spend, despite headwinds of high inflation and escalating borrowing costs.

Weakness in Retail Sales & Consumer Confidence To Persist

Brazil - Retail Sales % y-o-y & Consumer Confidence Index (2020-2022)

Source: Instituto Brasileiro de Geografia e Estatística, Fitch Solutions

Insights Into Consumer Spending

Our Country Risk team forecasts that Brazil’s economy will grow by a real rate of 0.8%, slowing from the high 4.6% recorded in 2021.Brazil’s short-term growth outlook will be subdued given elevated inflation and growing borrowing costs which will hamper consumers’ purchasing power and result in slow growth. However, in 2023, real GDP growth will expand to 1.5% y-o-y, akin to pre-pandemic growth levels, signifying relative protracted stagnation in the economy’s growth performance which will be buttressed by rising real consumer spending.

In 2023, unemployment, as a percentage of the labour force, will remain below 11.5%, although increasing by 0.9 percentage points from the 2022 unemployment rate of 11.3%. The combination of limited high value-add job opportunities, increasing debt burdens, and rising unemployment in the country may further constrain consumers’ ability to spend on other goods, as high consumer price inflation (an average of 10.5% y-o-y in 2022) places price pressures on the costs of food and fuel. As the Banco Central do Brasil (BCB) aggressively continues to hike interest rates, our Country Risk team forecast the country’s interest rate to increase to 13.75% by the end of 2022, placing debt servicing costs at a higher premium and weakening consumer investment and household spending. We forecast, however, that inflation and interest rates will decrease to 5.8% (average over the year) and 9.75% respectively in 2023, as real GDP growth gradually improves, restoring consumers’ ability to return to pre-pandemic spending patterns.

Brazil's Economic Overview
  2022f 2023f
Real GDP (% chg y-o-y) 0.8 1.5
Unemployment (% of total labour force) 11.3 11.4
Consumer price inflation (% y-o-y, ave) 10.5 5.8
Total tourist arrivals, '000 % y-o-y 94.5 41.3
f = Fitch Solutions forecast. Source: Local sources, Fitch Solutions

Inflation Outlook

Inflationary pressures continue to build. Over the latter half of 2022, inflation is beginning to shift into services such as tourism. Rising consumer price inflation has been the key risk to consumer spending over 2022, and it has been eroding purchasing power and shifting consumer spending away from discretionary spending. This is the economic reality that consumers enter into in 2023. Inflationary pressure started to rise globally in 2021, as localised shortages were created by base effects, higher commodity prices and supply chain challenges. The Ukraine-Russia conflict has also significantly impacted the global supply prices of key commodities, such as oil and gas, fertiliser, wheat, corn and barley. The commodity price increases are already feeding through into higher consumer prices and this will continue over 2022.

Inflation reached a year high of12.1% y-o-y in April 2022, and as of latest data (June 2022), stands at 11.9% y-o-y. We forecast inflation to average 10.5% over 2022, which will weigh down on consumer purchasing power and undermining consumer confidence. This will also contribute to existing headwinds that negatively affect consumer spending and limit consumer activity in the near-term. In addition, elevated inflation in the short term will constrain the Brazilian consumer’s appetite for discretionary spending as spending on essential items like food and housing become more prioritised. However, as base effects fade, inflation will gradually subside to an average of 5.8% in 2023, easing price pressures that inhibit consumer spending.

Inflation Will Ease Over 2023

Brazil - Consumer Price Inflation, % y-o-y (2016-2023)

Source: Instituto Brasileiro de Geografia e Estatística, Fitch Solutions

Household Debt Outlook

Brazil’s household debt, as a percentage of GDP, remains relatively stable albeit high, despite annual changes in the central bank’s interest rate. In 2020, the BCB’s interest rate fell to 2%, from 4.5% in 2019, resulting in lower debt-servicing costs and triggering a move by consumers to take on more debt (36.8% compared to 32.9% in 2019) during a period of economic uncertainty that saw household spending plummet to -5.5%. However, as the BCB’s tightened monetary policy in 2021 led to an annual interest rate of 9.25%, household debt fell to an estimated 36.6% with household spending rising to 3.6% y-o-y.

The BCB’s hawkish approach to combatting rising inflation in Brazil sees the country undergo continuous and aggressive rate hikes whereby Brazil’s policy rate rose from 2% in 2020 to an estimated 9.25% in 2021. Our Country Risk team forecasts Brazil’s interest rate to increase to 13.75% by end-2022 and subsequently decrease under 10% at the end of 2023. Higher interest will impact consumers’ credit willingness and their ability to repay credit as debt-servicing costs rise. This will depress consumption, resulting in even slower growth in real total household spending in 2022. However, with the BCB decreasing interest rates to 9.75% in 2023, total household spending y-o-y growth will recover as consumers spend less on debt-servicing costs.

Rising Household Debt Could Weigh On Spending As Interest Rates Rise

Brazil - Household Debt Vs Interest Rates (2018-2023)

Bank of International Settlements, Fitch Solutions

Government Support

In July 2022, a state of emergency bill was approved in Brazil, enabling the government to enhance its social policy funding. Sitting president, Jair Bolsonaro’s Auxilio Brasil social transfer programme will increase its payments to support Brazilian families in moderate-to-extreme poverty by 50%. Raising the monthly stipend amount from BRL400 (USD76) to BRL600 (USD114). In addition, farmers, commercial drivers and senior citizens will benefit from the enhanced stimulus. With a widening budget deficit due to rising public debt, the action taken may undermine investor confidence and intensify public policy uncertainty. Although the action may also be an unfair attempt to bolster public approval for Bolsonaro in his election campaign against leading candidate, Luiz Inacio Lula da Silva, for the October 2022 presidential election, the enhanced government support strategy may benefit consumers who may be more vulnerable to the country’s high inflation, thereby cushioning the effects of constrained consumer purchasing power.

Brazil 2022 presidential election candidate and incumbent, Jair Bolsonaro’s, populist, interventionist policies which includes an extension of fiscal stimulus measures to moderately support household incomes and consumer spending may help absorb shocks to consumer confidence. However, the outcomes of such measures may not be guaranteed as they exist within a framework of rising public debt. Policy uncertainty and the potential for weakened investor sentiment remain insidious as a result and may undermine a more positive growth outlook.

Wider Economic Issues

Supply chain issues continue, having first appeared when economies globally started to reopen in 2021, with consumers demanding products that they had little access to over 2020. This continues to place pressure on manufacturers, with bottlenecks and consumer good shortages emerging, which has fed through into supply side inflation. For example, the global semiconductor shortage will continue through 2022 and into 2023, putting pressure on the supply of multiple consumer goods. In 2022, the risks surrounding Covid-19 have moderated, as population immunity (from vaccines and prior infection) combined with less severe variants of SARS-CoV-2 have meant that death rates have remained low through recent infection waves. This has seen many markets globally adopt a more 'live with Covid-19' approach to movement and operating restrictions, although some nations are retaining a ‘Zero-Covid’ policy.

More transmissible variants of SARS-CoV-2 and Mainland China’s zero-Covid are causing the disruption/closure of factory production and manufacturing across the world. Manufacturers are facing shortages of key components and higher raw materials costs. Inventory levels are increasing, as consumer demand shifts away from products and into services, such as tourism. This will elevate some price pressures, as companies offload stock at a discount. Finally, the Russia-Ukraine conflict continues to place significant supply pressures on key commodities, especially food supplies, pushing up final market prices across a spectrum of consumer categories. Some countries, such as India, Malaysia and Argentina have reacted by placing their own restrictions on the export of food items, putting further pressure on global prices. The graphic below highlights some of these risks to the outlook impacting Brazil's consumer market in 2022 and into 2023.

Brazil Is Still Exposed To Several Risks
Risks To Outlook
Source: Fitch Solutions

This report from Fitch Solutions Country Risk & Industry Research is a product of Fitch Solutions Group Ltd, UK Company registration number 08789939 ('FSG'). FSG is an affiliate of Fitch Ratings Inc. ('Fitch Ratings'). FSG is solely responsible for the content of this report, without any input from Fitch Ratings. Copyright © 2021 Fitch Solutions Group Limited. © Fitch Solutions Group Limited All rights reserved. 30 North Colonnade, London E14 5GN, UK.

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