Services Sector in Brazil Shrinks As Growth Slows, Costs Rise

Brazil’s services sector shrank at a worrying rate in May, as businesses laid off employees in a bid to cut costs amid a slowdown in sales growth and rising inflation.

“It was a challenging month for service providers,” according to IHS Markit’s monthly purchasing managers index (PMI) survey released earlier this month.

However, the survey showed that many service providers are optimistic about the future, as they are hoping that online sales grow and President Jair Bolsonaro might reform the economy with business-friendly policies.

The services PMI fell to 47.8 in May from 49.9 in April. Generally, a dip below the 50 mark is considered a sign of recession.

“The post-election rebound seen in the service sector has faded away in May, with consumers and businesses increasingly cautious about their spending amid concerns over political impasses and its impact on the wider economy, as well as the currency,” Pollyanna De Lima, Principal Economist at IHS Markit, said.

“Cooling sales had a more pronounced impact as business activity and jobs were reduced.”

The falling PMI is a strong indication that Brazil’s economy is struggling to get out of recession or is falling back into recession, say analysts.

For the third month in a row, Brazilian services companies are seeing overseas demand decline. The contraction in export sales was the sharpest since last October, according to the report.

“May data showed an increasing degree of spare capacity among Brazilian services firms, as outstanding business fell at the quickest pace in the survey’s history,” the report noted.

Interestingly, finance and insurance companies bucked the trend however, with the survey finding those sectors adding more employees last month.