Brazil services PMI points to Q2 GDP contraction, possible recession

BRASILIA: Brazil's services sector activity shrank in June for the third month in a row, a closely watched purchasing managers index survey showed on Wednesday in the clearest warning sign yet that the economy may have slipped back into recession.

With Brazil's economy having contracted in the first quarter of the year, the latest IHS Markit PMI data showed that services, accounting for more than 70% of all economic activity, shrank in all three months of the second quarter.

"Official figures for the opening quarter of 2019 showed a 0.2% quarterly contraction in economic activity, and PMI data for the second quarter suggest the situation has worsened further, fueling recession fears," said Pollyanna De Lima, principal economist at IHS Markit.

"In the three months to June, manufacturing posted the weakest performance since the third quarter of 2018, although remained inside growth territory. But at the heart of Brazil's economy, services activity dipped into contraction," she said.

The services PMI rose to 48.2 in June from 47.8 in May, but remained below the 50.0 mark separating contraction from expansion. Brazil's composite PMI index, incorporating services and manufacturing, was 49.0 in June, below 50.0 for the second month in a row, IHS Markit said.

Services sector firms blamed "political and economic troubles" for the slowdown, as well as weaker underlying demand, IHS Markit said.

New business orders from abroad fell for the fourth month in a row and companies cut headcount again. Indeed, the rate of contraction in service sector employment was the fastest in 10 months, IHS Markit said.

Economists have slashed their 2019 growth outlook in recent weeks, citing high unemployment, a global slowdown and domestic political uncertainty surrounding the government's pension reform bill currently being debated in Congress.

The consensus now is that the economy will expand by less than 1.0% this year, down from 1.1% in the preceding two years, and that the central bank will soon start cutting interest rates aggressively.