Itaú BBA - Brazil’s unemployment rate increases in December

Latam Talking Points

< Back

Brazil’s unemployment rate increases in December

February 1, 2019

The reading was higher than our estimate and the median of market expectations (both at 11.4%).

Talk of the Day

Brazil

According to the national household survey (PNAD Contínua), Brazil’s nationwide unemployment rate remained at 11.6% in the quarter ended in December. The reading was higher than our estimate and the median of market expectations (both at 11.4%).

Using our seasonal adjustment, the unemployment rate increased 0.23 p.p. to 12.2% in 4Q18. Along with the decline in capacity utilization metrics, the result suggests that the output gap opened again during that quarter. Year-over-year growth in the real wage bill slowed to 1.7% from 2.2%, driven by weaker gains in employment.
** Full story
here.

The consolidated public sector posted a primary deficit of 108 billion reais in 2018 (-1.6% of GDP), beating the annual target of 161 billion reais (-2.4% of GDP) and close to the 2017 result of 111 billion reais (-1.7% of GDP). The central government had a deficit of 120 billion reais (-1.8% of GDP) vs. a target of 159 billion reais (-2.3% of GDP), while regional governments and state-owned companies posted surpluses of 3.5 billion reais and 4.4 billion reais, beating targets that were a surplus of 1.2 billion and a deficit of 3.5 billion reais, respectively. In December, the public sector had a primary deficit of 41.1 billion reais (expected: -37.7 billion), while the central government posted 31.8 billion reais (expected: -31.6 billion) .

The general government’s gross debt increased to 76.7% of GDP in 2018 from 74.1% in 2017, while the public sector’s net debt rose to 53.8% of GDP from 51.6% in the previous year. The nominal deficit narrowed to 7.1% of GDP from 7.8% in 2017, reflecting lower interest expenses. A favorable fiscal scenario depends strictly on the approval of reforms, such as the pension reform, that signal a gradual return to primary surpluses that are compatible with structural stabilization in public debt.
** Full story
here.

The MDB party has announced Renan Calheiros as the official candidate for the Senate’s speakership. The Senator defeated his party colleague Simone Tebet by 7 votes to 5. The Congressional elections are scheduled to begin today at 6:00 PM.

The Brazilian Central Bank's Monetary Policy Committee (Copom) meets again next week. The Copom's inflation forecast for 2019 will probably remain stable in the market scenario (which includes the exchange and interest rates forecasts reported in the Focus survey) and recede in the reference scenario (which assumes constant exchange and interest rates), compared to those disclosed in the 4Q18 quarterly inflation report. For 2020, the inflation forecast will likely show a slight increase in the market scenario and remain stable in the reference scenario.

With inflation forecasts anchored around the respective targets up to 2021, in a context where the level of slack in the economy remains high, we believe that the Copom will keep the Selic rate stable at 6.5% p.a. at the February meeting. The committee will probably emphasize that the conduction of monetary policy will remain vigilant and preserve flexibility to react to deviations from the baseline scenario. Such deviations may be due, in particular, to frustrations with the pace of economic activity that pressure the inflation path to below-target levels, as well as the lack of implementation of reforms and global pressures potentially acting in the opposite direction. In short, we believe that the Copom's communication will signal a symmetrical balance of risks around inflation forecasts.
** Full story
here.

Day ahead: December’s industrial production will be released at 9:00 AM (SP Time). We forecast a 0.4% mom/sa drop and a 4.6% yoy decrease. Also, January’s trade balance will come out at 3:00 PM, for which we expect a USD 2.7 bn surplus. 

Argentina

The monetary policy committee reaffirmed a cautious approach with monetary expansion originated in exchange interventions.   In the statement, the monetary authority increased the maximum expansion of the monetary base due to dollar purchases to 3% of the monetary-base target for February (USD 1.4 billion) from 2% in the previous two months. If the peso strengthens below the lower bound of the non-intervention zone, the central bank can purchase up to USD 75 million per day (USD 50 million before). According to the current monetary policy framework (monetary aggregate targeting), if the monetary policy becomes too tight, the exchange rate will likely strengthen. Consequently, the central bank may conduct unsterilized interventions to provide additional liquidity in pesos. We note that these self-restricted limits are below the USD 150 million permitted under the agreement with the IMF.  In the event of a weaker currency than the upper bound, the central bank can purchase up to USD150 million per day without cap for the month. 

The central bank said its main objective is to reduce inflation. The monetary authority stated that the expansion of the monetary base in January was 0.6% lower than that targeted for that month (adjusted by the impact of the purchase of USD 560 million) and do not rule out a similar outperformance in February (zero growth relative to January).  According to the press release, the purchase of dollars in January was the counterpart of the increase in peso-denominated time deposits. While the defect of monetary-base expansion will likely be reversed in the coming months, the central bank said it will maintain a cautious management of the monetary expansion. 

In our view, there are positive developments on the monetary front.  While the levels are still high, interest rates and inflation are on a downward path. However, we note that the existing inertia (mostly in wage negotiations) poses a major challenge to faster disinflation. We maintain our inflation forecast of 30% for 2019 and we expect the market-determined Leliq interest rate to fall to 32% by December this year.

Colombia

As expected, in the first monetary policy meeting of the year, the central bank of Colombia kept the monetary policy rate at 4.25%. The decision had the backing of all 7 board members, completing seven consecutive unanimous decisions, having started in April when the board voted to cut policy rate to the current level. The press release announcing the decision retained a neutral stance as it continues to reflect a board evaluating how current risks (uncertain external environment and an unconsolidated domestic recovery) could affect its baseline scenario, amid a well-behaved inflation.

We do not see the board in any haste to decrease the monetary stimulus. The unanimous decision to stay on hold - amid a still fragile activity recovery, contained inflation and an uncertain external outlook - suggests stable rates for the time being. We expect a mild monetary normalization to unfold later this year (policy rate is not far from neutral levels, according to our view and to the central bank’s) as the activity recovery consolidates. The timing of the next movement will likely being data dependent while risks are tilted to less tightening (if any). Echavarria commented that the market is expecting two rate hikes this year (April and October). The next monetary policy decision will take place on March 29.
** Full story
here.

The unemployment rate in the month of December surprised to the upside, as urban labor dynamics deteriorate. The national unemployment rate picked to 9.7%, 1.1pp up from the close of 2017. The urban unemployment rate rose to 10.8% (9.9% one year earlier), 0.2pp higher than our forecast and 0.7pp above the market consensus. In 2018, the total unemployment rate ticked up from 9.4% in 2017 to 9.7%. Falling urban participation and job destruction at the back end of 2018 reflects a weak labor market that poses a risk to the expected consumption recovery. Additionally, pessimistic consumer sentiment, an activity recovery that has not consolidated, anchored inflation expectations and a risky external environment favored the central bank keeping the policy rate stead y at 4.2 5% today.

We expect growth of 3.3% this year, picking up from 2.6% expected for 2018. Our expected activity recovery in part depends on a labor market recovery. Low interest rates, higher real wages (as inflation is low) and some recovery of oil prices would likely aid the rebound from last year.
Full story
here.

Chile

The composition of net job creation remained favorable in 4Q18, while total employment growth stabilized following a prolonged slowdown period. The unemployment rate of 6.7% for 4Q18 (0.3pp higher than one year ago) was in line with market expectations, resulting in a 7.0% unemployment rate in 2018 (6.7% in 2017). The labor force growth was 1.1% yoy in 4Q18 (0.9% in 3Q18), more than offsetting the employment growth of 0.7% (0.5% in 3Q18), while still falling participation (-0.4pp over the 12-month period) contained the tick-up in the unemployment rate.

Salaried job creation continued to lead employment growth (+59 thousand in 4Q18), a feature that was prominent throughout the year. Public salaried jobs grew 3.2%, moderating from 5.6% in 3Q18 as fiscal consolidation unfolds, while private salaried jobs grew 0.9% (1.1% in 3Q18). Self-employment fell 1.3% from one year ago (+0.2% in 3Q18). Categories driving total job growth in the quarter were health, construction and communications, while manufacturing and retail led the job shedding.

Some tightening of the labor market (unemployment to 6.7%) is expected this year, given the lagged dynamism in the labor market relative to the economic recovery.
** Full story
here.

Industrial production recovered in the final quarter of 2018. Industrial production increased 1.0% yoy in the final month of 2018 (0.4% in November), resulting in a recovery of 2.9% in the year (1.1% contraction in 2017). Manufacturing in December disappointed with mild growth of 0.8% (our call: 1.5%; market consensus: 0.9%), but was still an improvement from the 4.7% drop in November. Mining activity grew 1.3% in the month (5.7% in November), and led industrial production growth in 2018. We expect the monthly GDP proxy to grow around 3.5% yoy in December, leading to growth of 4.0% in 2018 (1.5% in 2017).

Strong credit demand indicators in 4Q18, robust imports of capital goods and a rebound of business confidence back into optimistic ground this month point at favorable activity dynamics in the short term. Nevertheless, uncertainty from the global trade negotiations and weaker activity in the core economies pose a risk to our growth forecast for this year (3.5%).
** Full story
here.

Mexico

Main public finance indicators reflect the final year of fiscal consolidation of the previous administration, but slightly below the Ministry of Finance (MoF) estimates. Nominal fiscal balance posted a deficit of 2.1% of GDP in 2018 (from a deficit of 1.1% of GDP in 2017 or 2.1% without the Central Bank dividend), slightly below the deficit estimate of the MoF for 2018 of 2.0% of GDP. In turn, the primary balance posted a surplus of 0.6% of GDP in 2018 (from a surplus of 1.4% of GDP in 2017 or 0.4% without the Central Bank dividend) slightly below the 0.7% of GDP surplus estimated by the MoF for 2018. However, the Public Sector Borrowing Requirements (PSBR), the broadest measure of nominal balance, posted a deficit of 2.3% of GDP (from a deficit of 1.1% of GDP in 2017 or 2.5% without the Central Bank dividend), better than the estimate of the MoF (a deficit of 2.5% of GDP).

Public debt was stable in 2018. Public debt decreased slightly to 46.8% of GDP year end 2018 (from 46.9% in 2017), while net public debt stood practically unchanged year end 2018 at 46.0% of GDP year end 2018 (from 2017). In turn, the Historical Balance of Public Sector Borrowing Requirements (the broadest measure of debt) stood at 44.8% of GDP year end 2018 (from 45.8% of GDP).

Looking forward, the 2019 budget shows AMLO’s administration commitment with responsible public finances, but execution is a risk. 2019 budget includes a primary surplus of 1% of GDP (above the 2018 primary surplus of 0.6% of GDP) and a nominal fiscal deficit of 2.0% of GDP (broadly the same as 2018 deficit). However, given the substantial expenditure for AMLO’s economic and social programs (which will be financed with overoptimistic fiscal savings) and downside risks to economic activity (US slowdown, uncertainties generated by domestic policies and the fall in oil production), reaching those targets will be challenging. However, we note that at the beginning of the first year of a new administration, there is usually underspending. So, not necessarily, low fiscal deficits in early 2019 should be read as a sig n of fiscal prudence.
** Full story
here.

Peru

Day ahead: The CPI inflation for January will come out at 3:00 PM (SP Time). We expect a 0.22% mom increase, leading the year-over-year rate to 2.30%.



< Back