Itaú BBA - Evening Edition – Brazil’s unemployment rate increases in December

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Evening Edition – Brazil’s unemployment rate increases in December

January 31, 2019

Brazil’s nationwide unemployment rate remained at 11.6% in the quarter ended in December

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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.
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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.
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Tomorrow’s Agenda: 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. Finally, the Congressional elections are scheduled for tomorrow, although it may be postponed until next week, according to some news. 


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.
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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%).
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Yesterday, the board of the central bank unanimously opted to raise the policy rate by 25bp to 3.0%, as widely expected. This is the second hike in the normalization cycle, following last October’s increase of the same magnitude. The board continues to see the domestic economy consistent with the scenario outlined in the 4Q18 Inflation Report (IPoM), as activity remains robust and output gap-sensitive inflation measures are gradually rising. However, the press release announcing the decision toned down the tightening bias, due to weaker-than-expected growth in the core economies (leading to a more accommodative monetary policy stance by the main central banks). The press release highlighted strengthening credit demand in 4Q18, strong investment indicators, stable wage growth (at 4%), while acknowledging some weakening in durable consumption performance. In turn, the relevant core inflation measure (which excludes food and energy) continues on an upward trajectory to the 3% target.

However, in the concluding remarks, the board mentions that the 1Q19 IPoM (to be published April 1) will place special focus on the evolution of the international scenario and how this could affect the convergence of inflation to the target. The press release notes the deteriorating growth expectations for developed economies and the signaling of a more gradual normalization process of monetary policy globally. If the central bank considers the worsening global outlook to have a significant negative impact on the small open Chilean economy, the board could favor an even more gradual normalization process (relative to the 4Q18 IPoM). We also note that the board dropped the reference to a “highly expansionary” monetary policy position that was highlighted in the December communiqué. The board’s previous evaluation on the degree of monetary stimulus came amid an output gap that had narrowed significantly.

We retain our view of a gradual normalization cycle, with risks clearly tilted to fewer hikes. Moreover, the timing for future rate hikes appears to be more data dependent now. However, as the policy rate remains far from neutral levels (4.0%-4.5%), and the central bank views the output gap near closed, the continuation of a gradual tightening process is justified.
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On fiscal accounts, Chile’s fiscal consolidation in 2018 advanced. The nominal fiscal balance reached a deficit of 1.7% of GDP, from a 2.8% of GDP deficit in 2017, smaller than the 1.9% deficit forecasted by the government in September. The smaller than expected deficit can largely be attributed to taxes from the private sale of a stake in a non-metallic mining company. Overall, fiscal consolidation is underway with real expenditure growth slowing to 3.4% last year (4.7% in 2017), the lowest gain since 2011. Current expenditure rose 3.9% (6.4% in 2017), while capital expenditure recovered with growth of 0.9% (-3.2% in 2017), the first positive print since 2015. Meanwhile, revenue in real terms grew 8.8% in 2018 (4.7% in 2017), lifted by the 83% rise in private mining income tax, while revenue from Codelco grew 21.4% as copper price s continued to recover in the year. VAT revenue is the largest single contributor to revenue (47.3%) and increased 5.0% in the year. Overall, Chile’s 2018 structural deficit came in at 1.5%, from the 2.0% recorded in the previous year, in line with converging to a 1% of GDP in 2022 deficit. 

Gross public debt ticked up to 25.6% of GDP in 2018, from 23.6% in 2017 and 21% in 2016. Finance Minister Felipe Larrain commented that the 2pp increase in debt can be explained by debt issuance, while the aim would be to stabilize debt to GDP in 2019. Given that the debt level for Chile remains low compared to peers, stabilization would likely keep rating agencies at bay (the preoccupation has rather been with the speed of the debt increase). Despite the commitment to even lower expenditure growth this year (3.2% yoy budgeted), we see the nominal fiscal deficit broadly stable this year as copper prices post some retreat and activity moderates as the global economy slows. 


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.
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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.
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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.
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Tomorrow’s Agenda: 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%.

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