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SAO PAULO, Dec 11 (Reuters) - Brazilian retailers are expecting their worst Christmas season in a decade and signs are pointing to an unhappy New Year ahead.
Shoppers are cautious and retail unions are ready for layoffs, adding to headaches for recently re-elected President Dilma Rousseff, whose push for fiscal austerity to win back investor confidence comes just as an economic slump hits home.
Consumer confidence is at depths last seen in the 2008 financial crisis, as the fourth straight year of high inflation and mediocre growth in Latin America's largest economy take a toll on the jobs market.
The average family's debts have also swollen to nearly half of their annual income, up from one third in 2008, making Brazilians wary of new borrowing and vulnerable to interest rates now at a three-year high.
"Credit cards, utilities - it seems like all the bills are going up these days. You've got to save on something," said Maria Fernanda Pieroni, 30, an information technology specialist at a mall in Sao Paulo looking for cheaper gifts this year.
About 43 percent of Brazilians are planning to spend less on Christmas than they did last year, while just 12 percent aim to spend more, according to a survey by the Getulio Vargas Foundation, a local think tank.
More bargain hunting is good news for a handful of low-cost retailers such as Lojas Americanas SA, whose flexible sales mix and small-ticket items have helped shield sales growth from the broader slowdown. But most consumer companies, such as cosmetics maker Natura SA and apparel chain Cia Hering, are likely to continue to struggle with weak demand.
Brazil's National Confederation of Commerce estimated Christmas sales volumes will advance just 2.6 percent from a year ago - the weakest outlook since 2004.
The 10 percent drop in Brazil's currency this year has also driven up the cost of imported goods and materials, squeezing profit margins.
Fashion retailer Restoque, which has struggled to maintain profitability, canceled a share offering on Thursday, citing tough market conditions.
After battling the slowdown of recent years with cheap credit and tax breaks, Brazil's government has run out of fiscal firepower. Incoming Finance Minister Joaquim Levy is looking at ways to roll back tax incentives on cars, refrigerators and other consumer goods to close a federal budget gap.
Companies accustomed to booming credit and double-digit sales growth are shifting their strategies, stocking smaller inventories and holding back on seasonal hiring.
Temporary retail hires in the final months of the year usually offset seasonal layoffs in construction and agriculture, but the anemic retail sector contributed to the first net loss of jobs in October in at least 15 years.
The worst is still to come, said Ricardo Patah, the head of Sao Paulo's retail workers union. He warned that widespread layoffs are likely early next year if holiday sales are as weak as expected, up about 1 percent in his estimate.
"In the 1990s every January was a tragedy. We had lines upon lines of fired workers filing their papers at the start of each year," Patah said. "Over the past decade we've avoided that, but this January could be the worst in years."
The jobless rate will likely rise in 2015 for the first time in a decade, according to Arthur Carvalho, Brazil chief economist for Morgan Stanley. He expects shrinking family budgets to push the economy back into recession next year.
"The problem is that after a decade of fast-growing wages, you don't know how much leverage there is in the system," Carvalho said. "There could definitely be a hangover." (Additional reporting by Marcela Ayres and Bruno Federowski in Sao Paulo, Juliana Schincariol in Rio de Janeiro; Editing by Todd Benson and Kieran Murray)