Services post growth in May, which should herald slow interest cuts

Brazil’s latest data for the services sector confirms what markets read between the lines of Tuesday’s inflation report: the sector, responsible for more than 70 percent of the country’s GDP, recorded 0.9 percent growth in May, offsetting part of the 1.6 percent drop in April and showing that it continues to grow.

The results suggest the Central Bank’s Monetary Policy Committee is likely to start cutting the country’s benchmark interest rate slower than expected some days ago. 

The services sector grew 4.7 percent, when compared to May 2022, and 6.4 percent in 12 months — above pre-pandemic growth levels. The reading is based on samples of gross revenue from non-financial companies. Among the five activities analyzed by the survey, four grew in May.

The most significant influence came from the transport sector, which grew 2.2 percent — reversing the 4.3 percent drop in April and driven by agriculture’s strong performance at the moment. The segment includes cargo transport, which increased by 3.7 percent in May, its highest monthly growth on record. Passenger transport also expanded in May. 

“This impact [of transport services] is not new. From May 2020, at the beginning of the pandemic, there was important growth in this sector, very much linked to the increase in agricultural production and also to the boom in e-commerce, with the large-scale migration of sales in physical stores to online platforms,” said Rodrigo Lobo, a research manager at the Brazilian Institute of Geography and Statistics.

Services provided to families, including the food and lodging industry, kept on growing in May, in a movement that reflects not only the clear choice of Brazilian families to spend more on services than on goods — even in a difficult moment of high indebtedness levels —, but also the increased demand from companies. 

The services sector is usually the last to respond to monetary tightening due to the characteristics of its activities — it is easier to swap a clothing store for a cheaper one, for example, rather than change a child’s school or the beauty salon that a family has gone to for years.

Analysts believe that in this sense, raising the minimum wage by 1.4 percent to BRL 1,320 (USD 269) and the general drop in food prices may have helped the higher consumption of services in May.

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