Brazil’s retail sales ended the first half of the year on a strong footing, official figures showed, surging back to pre-crisis levels as the easing of lockdown measures to combat the coronavirus pandemic continued across the country.

Retail sales rose more than forecast and May’s record rise was revised higher still, adding weight to the view among government and central bank officials that the economy is recovering quicker than expected from the crisis.

Retail sales excluding cars and building materials jumped 8% in June, statistics agency IBGE said, more than the median forecast of a 5.4% rise in a Reuters poll of economists.

Seven of the eight sectors covered by IBGE showed a rise in sales. Fabric, clothing and footwear rose 53.2% on the month, furniture and home appliances rose 31% and other personal and domestic goods rose 22.7%, IBGE said.

The month-on-month figure for May was revised up to a new record 14.4% increase from 13.9%.

As the chart below shows, that brought the seasonally-adjusted retail sales volumes index up to 96.1, the highest this year and showing a sharp V-shaped rebound to recover all the ground lost earlier in the year.

“The positive results were expected because we came from a very low base. Growth was widespread, across almost all activities. Since the beginning of the pandemic, we have broken many records, both negative and positive, so the numbers are very volatile,” IBGE research manager Cristiano Santos said.

On an annual basis, sales rose 0.5% in June compared with the same month last year, IBGE said. Economists in the Reuters poll had expected a fall of 3.45%.

Sales were down 3.1% in the first half of the year, IBGE said, the worst January-June performance since 2016 when Brazil was last in recession.

Brazil’s economy is expected to post its biggest ever annual decline this year. But central bank chief Roberto Campos Neto has said the bank’s own forecast of a drop of 6.4% is too pessimistic, and on Tuesday he said that Brazil’s will be one of the fastest rebounds in emerging economies.

Meanwhile, Brazil is amassing a record debt that has evoked memories of crises past in South America’s largest economy, but some economists say rock-bottom interest rates and low foreign debt mean the government can continue to spend its way out of recession.

The debate in Brazil about getting the public finances in order is cranking up, with a key government fiscal rule looking set to be broken.

Brazil is on course to post a record 800 billion reais ($115 billion) budget deficit this year due to crisis-fighting expenditure, swelling the national debt to a high of around 95% of gross domestic product - an exceptional level for an emerging market economy.

Barring a dramatic surge in revenues or an expenditure squeeze, the spending cap - which limits growth in non-obligatory government outlays to the rate of inflation - will be broken next year.

The government will present its 2021 budget later this month. The ceiling is 1.485 trillion reais ($275 billion), only 31 billion reais more than this year. That leaves hardly any room for maneuver in normal times, never mind the extra social, health and investment spending needed in a pandemic.

Economy Minister Paulo Guedes and many economists say the cap, passed during the presidency of Michel Temer in 2016, is the foundation on which Brazil’s fiscal credibility is built. The belief that it will not be breached has compressed market-based interest rates and given the central bank room to cut official rates to a record low of 2.00%, they said.

But several market-based rates show scant evidence of these fears, and the case for maintaining or even increasing deficit spending to mitigate the biggest economic crash on record is compelling, many others say.

Congress already passed an emergency ‘war budget’ this year worth around 600 billion reais, which is exempt from normal budget rules like the spending cap.

“Just as the market has learned to live with an 800 billion reais deficit, it can learn to live with a conversation about modifying the spending cap. It’s inevitable it will be changed in some way,” said Jose Francisco Goncalves, chief economist at Banco Fator in Sao Paulo.

Crucially, just 3 per cent of Brazil’s total $1.45 trillion debt is in foreign currency, according to the Bank for International Settlements. That is one of the lowest levels in emerging markets — leaving the government less exposed to currency fluctuations than in the past.

Reuters