August 3, 2012 / 1:02 PM / 7 years ago

Brazil services sector shrinks at fastest pace in 3 years - PMI

* Services sector cools down at fastest pace in over 3 years

* HSBC Services PMI at 48.9 in July

* Index belies expectations of economic rebound

By Silvio Cascione

SAO PAULO, Aug 3 (Reuters) - Brazil’s services sector shrank in July at the fastest pace in over three years, according to a private survey released on Friday, raising doubts on whether the world’s sixth-largest economy will rebound as expected over the next months.

Once-booming Brazil has been flirting with recession for nearly a year despite record-low interest rates, as high factory costs and weak global demand hurt its factories.

Brazil, the largest Latin American economy, has managed to post weak growth thanks to its services sector, but that support - which helped keep job growth and consumer confidence around all-time highs - is fading quickly, the survey showed.

HSBC’s Business Activity Index for the Brazilian services sector, based on a purchasing manager’s survey, fell to 48.9 in July from 53.0 in the prior month after seasonal adjustments - back below the 50 mark that divides growth from contraction. That was the lowest reading since May 2009.

That data is based on a single question asking survey respondents to report on the change in business activity at their companies compared to the previous month.

Combined with another dismal manufacturing performance of the purchasing managers index, the services data pushed the HSBC Brazil Composite Output Index also down to 48.9 in July from 51.5 in June.

The manufacturing PMI was released on Wednesday and showed factory activity contracting for the fourth straight month.

“The fact that the second half of 2012 has begun with such a poor performance may weigh on expectations regarding the rest of the year,” said Andre Loes, HSBC’s chief economist in Brazil.

Optimism towards future activity among Brazilian services providers fell for the fourth month in a row to the lowest level in a year and a half. Brazilian services companies also reported the slowest rate of job creation in ten months.

Brazilian services providers blamed weak demand for the decline in activity, with new business rising only slightly.

Official data on Brazil’s retail sales in July will only be released on Sep 13. The latest numbers available showed a surprise drop in May.

Brazil, which surpassed Britain last year to become the world’s No. 6 economy, is home to near 200 million people. Many of them were lifted out of poverty in the past decade and formed a large consumer market as the country benefited from China’s huge appetite for raw materials like iron ore and soy.

A sluggish performance of Brazil’s main growth engine may frustrate expectations of an economic rebound after eight consecutive interest rate cuts and a battery of tax breaks.

Economists expect Brazil to grow a little less than 2 percent this year after staying nearly stagnant in the past quarters, according to a Reuters poll.

“Very worried” about Brazil’s chances for a meaningful recovery this year, President Dilma Rousseff —who still enjoys high popularity rates— will likely announce new measures aimed at lowering taxes and increasing investment.

Brazilian services providers also reported slightly stronger price pressures than in previous months. Higher raw material prices and exchange rate fluctuations contributed to the overall rise in costs, according to the survey.

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