June 5, 2019 / 2:05 PM / a year ago

UPDATE 1-Brazil services activity shrinks again, ringing recession alarm

(Adds details, quote, context)

By Jamie McGeever

BRASILIA, June 5 (Reuters) - Economic activity in Brazil shrank in May, IHS Markit’s monthly purchasing managers index surveys showed on Wednesday, raising the risk that Latin America’s largest economy could be back in recession.

The services PMI showed services sector activity fell at an even faster rate than in April, while following Monday’s manufacturing data, the composite PMI fell into contractionary territory for the first time since September last year.

The services PMI fell to 47.8 in May from 49.9 in April, the second consecutive month below the 50.0 mark that separates contraction from expansion. The composite PMI index fell to 48.4 in May from 50.6, the first contraction since September last year.

“Aggregate output declined for the first time since last September, while there were back-to-back cuts to employment due to idle capacity and cost-reduction measures,” Pollyanna De Lima, Principal Economist at IHS Markit, said.

“The post-election rebound seen in the service sector has faded away, with consumers and businesses increasingly cautious about their spending amid concerns over political impasses and its impact on the wider economy,” she said.

The closely watched PMIs are often seen as a leading indicator of wider gross domestic product (GDP) growth. With first-quarter GDP falling 0.2%, the first contraction since 2016, these figures suggest the economy is struggling to grow in the second quarter.

IHS Markit said May was a “challenging” month for Brazilian service providers, who were severely tested by “subdued market confidence, low consumption, political issues and currency weakness.”

IHS Markit also noted a “widespread” decline in employment, leading to a fall in private sector jobs for the second straight month. Spare capacity across the economy jumped significantly, as outstanding business fell at the fastest rate in the survey’s history going back to 2007.

Services sector companies remained upbeat on the 12-month outlook, with optimism underpinned by hopes of improving economic conditions, fiscal reforms, greater online sales and new partnerships.

But taking into account the more gloomy outlook in manufacturing, the aggregate degree of optimism was among the weakest seen since prior to last October’s general election. (Reporting by Jamie McGeever Editing by Bernadette Baum)

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