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SA, Brazil to sing the backslide blues

Modest economic gains threatened by political uncertainty

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Brazil is likely to fall back into recession later this year and the South African economy may also continue to contract, according to a forward-looking economic indicator.

Latin America’s largest economy returned to growth in the first three months of this year, with quarter-on-quarter expansion of 1% officially ending a brutal two-year recession, the worst in Brazil’s history.

However, the country is set to slide back into recession, possibly in the third quarter of the year, according to Ed Jones, CEO of World Economics, which produces a family of sales managers’ indices, or SMIs.

These are based on replies from a panel of salespeople across the services and manufacturing sectors of countries surveyed, and Jones claims it is the most forward-looking data series available.

Good pedigree

While the SMIs are little known, they have good pedigree. The parent company of World Economics, Information Sciences, developed the widely followed purchasing managers’ indices, or PMIs, now owned by Markit.

After rising above the 50 level that marks the boundary between expansion and contraction in May, World Economics’ headline SMI measure for Latin America fell back to 48.9 in June.

Although there is no specific measure for Brazil, the nine-nation Latam figure is heavily weighted towards Brazil and Mexico. There is a specific reading for Mexico: 51.0 in June, suggesting a modest pick-up in growth in the central American state, which is currently running at 0.7% quarter on quarter.

“It’s Brazil which is the problem. Up until March it had been picking up a bit but in recent months we have started to see it taking a dip again,” said Jones.

Of the five sub-indices that feed into the headline Latam SMI reading, the market growth and staffing levels indices are both in negative territory, with sales growth barely above 50 and both prices charged and business confidence positive but falling sharply.

“Business confidence is a leading indicator for sales and market growth, and it came back down again in June,” added Jones.

Revised downwards

Based on the SMI data, he expected Brazil’s 1% first-quarter growth figure to be revised downwards, the second-quarter number to be still lower and by the third quarter, “It might be dipping back into recession.”

Others have similar fears. Sergio Trigo Paz, head of emerging-market debt at BlackRock, also believed Brazil was heading back into recession.

“Everything is pointing down on the Brazil side,” he said after criminal charges were filed against President Michel Temer, deepening the country’s political crisis and threatening to further destabilise the economy.