Brazil's downturn worsens as job losses mount and inflation climbs

Brazil lost jobs in May at an unprecedented pace for the month as economic activity tumbled and inflation soared beyond forecasts, government data showed on Friday, in further evidence of Latin America's largest economy's steep downturn. Brazil's economy shed a net 115,599 payroll jobs in May, the labour ministry said, the worst result for the month since the current data series began in 1992.
Earlier on Friday, government data showed economic activity fell 0.84 percent in April from March, more than double market expectations, and inflation spiked to 8.80 percent in mid-June, nearly twice as much as the official target of 4.5 percent. The numbers underscore expectations that Brazil's economy is shrinking at the fastest pace in a quarter century this year, even though official gross domestic product numbers still fall short of confirming a technical recession.
The decline of what was among the world's hottest emerging markets for most of the last decade has undermined the popularity of President Dilma Rousseff and casts a shadow on the country's investment-grade rating as tax revenues fall. More than 200,000 jobs have disappeared since the beginning of the year, sending the unemployment rate to a four-year-high of 6.4 percent in April. Economists say it has further to rise as job losses continue to pile up, potentially topping 8 percent in the second half of the year.
"On the positive side, the faster pace of increase in unemployment should help lower inflation faster than the pessimists expect; on the negative side, the acceleration in unemployment will cripple growth and most likely create asset quality problems," Morgan Stanley economists led by Arthur Carvalho and Luis Arcentales wrote in a note. Yields on interest rate futures rose as traders added bets on successive interest rate increases after the bank reiterated earlier this week that it is seeking to halve inflation to 4.5 percent by end-2016. Inflation has remained high despite weak growth mostly because of a string of increases in government-regulated prices since the beginning of the year. Lottery prices, electricity rates and fuel taxes have increased as part of Finance Minister Joaquim Levy's efforts to save the equivalent of 1.1 percent of GDP in the government's budget this year.