Itaú BBA - Evening Edition – Unemployment rate declines in Brazil

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Evening Edition – Unemployment rate declines in Brazil

June 28, 2019

See our Week Ahead full note at the end of this report.

Talk of the Day


According to the PNAD household survey, the nationwide unemployment rate receded to 12.3% in the quarter ended in May, in line with our forecast and the median of market expectations. Compared to the same month of 2018, the indicator declined 0.4 p.p. Seasonally adjusted, the unemployment rate slid 0.1 p.p. to 11.8%, as the employed population increased 1.3% qoq/sa (from 1.1% qoq/sa in April), while the participation rate increased to 62.1% (from 61.9% in the previous month). Despite the result, recent data on formal job creation and business confidence indicate that the economic recovery has stalled. Going forward, the current level of the overall business confidence (despite the small rebound in June) doesn’t suggest an acceleration of formal job creation. We expect the seasonally adjusted unemployment rate to remain virtually stable throughout the year. ** Full story here.

On fiscal accounts, the consolidated public sector posted a primary deficit of BRL 13 billion in May, somewhat better than our forecast and market consensus (both at BRL -14.4 billion). The central government experienced a deficit of BRL 14.7 billion (close to our BRL -15 billion estimate). Regional governments posted a surplus of BRL 1.2 billion and state-owned companies showed a deficit of BRL 1.1 billion, while we anticipated a surplus of BRL 0.5 billion for both. The consolidated primary deficit over 12 months remained at 1.4% of GDP, matching the April print. The public sector’s net debt widened to 54.7% of GDP in May, from 54.4% in April. The general government’s gross debt declined at the margin to 78.7% of GDP from 79.0%, thanks to reimbursements by development bank BNDES to the National Treasury. Over 12 months, the nominal deficit excluding FX swap transactions remained at 6.8% of GDP. In our view, meeting the public sector’s annual primary deficit target of BRL 132 billion requires discipline, but shouldn’t be so challenging, especially in case of a successful oil auction from the transfer-of-rights area (‘cessão onerosa’), expected in October, which could improve this year’s primary result by about 52 billion reais (0.7% of GDP). 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.

According to FGV, business confidence in the service sector advanced 2.2 p.p., to 91.2 in June. The breakdown shows an increase in both the expectations component (+3.0 p.p.) and in the current situation index (+1.2 p.p.). This result goes in line with the rebound also registered in the consumer, retail and construction confidence indicators in the period – only the industrial sector confidence receded in June.

On a separate note, according to the Ministry of Foreign Affairs, Mercosur and the European Union reached a free trade agreement. The treaty addresses tariff and regulatory issues, covering services, government procurement, trade facilitation, technical barriers, sanitary and phytosanitary measures, and intellectual property. According to a joint statement released by the participants, "the conclusion of the agreement underscores the commitment of the two blocs to economic openness and the strengthening of competitiveness."

Yesterday, the National Monetary Council (CMN) published the inflation target for 2022. It was set at 3.5%, in line with market expectations and the downward trend of gradually lowering the target 25 bps per year, from 4.25% in 2019 to 3.5% in 2022.


Industrial production, which aggregates mining, manufacturing and utilities, fell 0.2% yoy in the month of May (+0.7% in April). Driving activity in the month was the 1.9% yoy increase of manufacturing (-1.5% in April), above the market consensus of 0.3% growth and our 1.0% forecast. After adjusting for calendar effects, the manufacturing grew at a stronger 2.6% (-0.2% in April). At the margin, momentum was strong, although after a very weak 1Q19. Industrial production accelerated to 6.3% qoq/saar (following a 5.7% contraction in 1Q19; +3.6% in 4Q18), boosted by mining activity and some manufacturing improvement. Nevertheless, going forward, the extensive mining strike in June will curb the dynamism gains. Overall, the industrial production data along with our expectation of mild retail activity in the month suggests that the GDP proxy will continue to grow below potential at 2.3% in May, similar to the previous month. ** Full story here.

The unemployment rate came in line with expectations at 7.1%, 0.1pp above the rate 12 months earlier. The labor market in the quarter ended in May continued to show declining participation and low private salaried job growth, which, along with depressed sentiment, point at weaker consumption dynamism ahead. Job creation grew at a stable pace of 1.4%, lifted by the public sector. With fiscal consolidation efforts expected ahead, the employment boost from the public sector is unlikely to endure. The labor force also grew at a steady 1.5%, but participation continued to fall 0.2pp from last year (to 59.7%). Complementary labor data (pension contributions; lagged by two months) remained upbeat and in line with elevated public salaried job growth. With the growth outlook deteriorating, the labor market is unlikely to improve meaningfully, so we see the unemployment rate broadly stable at 7% this year. ** Full story here.


The unemployment rate in May surprised to the upside, despite a sharp fall in the participation rate. The national unemployment rate picked up to 10.5%, from 9.7% one year ago, driven by the urban unemployment rate rising 1.1 p.p. to 11.2%, above the market consensus (10.8%) and our forecast of 10.9%. The unemployment rate rise is due to a sharper shedding of jobs (mainly self-employment) compared to the registered decline of the labor force. In the quarter ending in May, the total unemployment rate was 10.6%, up 1.1 p.p. over twelve months, with the urban unemployment rate reaching 11.5% (10.5% one year ago). The loosening labor market, amid depressed sentiment and a more complex global context point to weak consumption dynamism ahead. We expect the unemployment rate to rise for the fourth consecutive year to 10.3% (9.7% for 2018). The loosening of the labor market, along with below potential growth and controlled inflation make us believe the central bank will ease monetary policy ahead. ** Full story here

The Week Ahead in LatAm


On Tuesday, the central bank will release its monthly expectations survey. In the latest survey, analysts slightly raised their inflation forecasts for 2019 (to 40.3% from 40.0%) and for 2020 (26.1% from 25.2% before). We expect no further deterioration of inflation expectations given the stabilization of the nominal exchange rate.

On Wednesday, the car-makers association (ADEFA) will release June data on production, exports and domestic sales to car dealers. Auto production fell 35.3% yoy in May and domestic sales plummeted 63.1% yoy affected by the depreciation of the peso and high interest rates, while exports rose 1.9% yoy. 

Manufacturing and construction data for May will see the light on Thursday. We expect to see another year-over-year drop in manufacturing (-8.9% in April). According to the IPI (a private index published by OJF consulting firm), manufacturing fell 3.8% in May but grew 2.0% (SA) relative to April. Construction activity also contracted in May, according to private indicators like Grupo construya index (-12.9% yoy).


On economic activity, next week’s highlight will be May’s industrial production, to be released on Tuesday. We forecast a 0.7% decline on seasonally adjusted terms, after a 0.3% increase in the previous month. Two indicators related to June’s industrial production will also come in: Anfavea auto production (Thursday) and Fenabrave vehicle sales (without a specific date).

On external accounts, June’s trade balance will be released on Monday, for which we expect a USD 5.5 bn surplus, somewhat below the USD 5.8 bn observed in the same month of last year. In month-over month-terms, both exports and imports are set to recede (4.4% and 5.5%, respectively). Over 12 months, we expect the trade balance to decrease slightly to USD 57.2 bn (from USD 57.5 bn) while the SAAR three month moving average increases to USD 54.5 bn (from USD 52.5 bn).

Finally, on the political front, all eyes will be focused on the pension reform’s special committee. According to the rapporteur, Samuel Moreira, the final report may be presented on Tuesday, and the voting session is likely to take place in the following day. As we approach the legislative break (July 17-31), it will be important to monitor how these next steps will evolve in order to gauge the timing of the first Lower House Floor vote.


On Wednesday, INE will publish the private consumption activity indicators for May. Retail sales in April contracted by more than expected, dragged down by durable good sales, suggesting that the sluggish activity start to the year likely persisted into 2Q19. Retail sales including vehicles fell 0.8% over twelve months (+0.9% in March). Meanwhile, wholesale trade continued to drive commercial activity, as sales of investment-linked materials remained elevated. Despite still low consumer sentiment and falling new car sales, retail sales growth would improve to 1.0% yoy, temporarily boosted by seasonal promotions.

On Friday, the central bank will publish the GDP proxy (Imacec) for May. As has been the case so far this year, activity grew below potential in April. The Imacec increased 2.1% yoy (1.8% in March), with growth aided by a mining recovery, while services still led the rest of the economy. Sectorial data showed weak mining production, while there was some manufacturing sector improvement and retail activity is expected to tick up. Overall, we expect the monthly GDP proxy (Imacec) to grow 0.3% (SA) from April and result in annual growth of 2.3% (NSA) in May.

Nominal wage growth for May will be released on Friday. Wage growth remained solid in April. Nominal wages grew 5.1% YoY (4.7% previously), resulting in a real wage expansion of 2.6% (2.3% in March). In the quarter ended in April, nominal wages expanded 4.7% (4.0 in the 4Q18; the highest since May 2018), while real wages ticked up to 2.3% (1.2% in 4Q18) aided by low inflationary prints. The recent activity slowdown may curb wage gains.


On Tuesday, the central bank will publish the minutes of the decision to hold the policy rate at 4.25% at the June monetary policy meeting. Despite the stable rates decision, we expect the minutes to build on some of the dovish signals we identified in the press communication. In particular, lower rates ahead could be justified if risks are tilted to a widening output gap, while inflationary pressure are broadly controlled, a lower neutral rate possible and monetary-policy loosening by the Fed materializes. 

The institute of statistics (DANE) will publish exports for the month of May on Wednesday. Higher oil prices and volumes boosted exports in April. Total exports grew 2.2% yoy in April (0.7% decline in March) as the oil recovery consolidated with growth of 22.2% (21.3% in March). Rising volumes and prices supported the oil export growth. We expect May exports to come in at USD 4.0 billion, a 7.5% yoy rise, boosted by oil exports and some coal recovery.  

Inflation for the month of June will be released on Friday. May annual inflation picked up, to 3.31% (3.25% in April), driven by the volatile food component. Meanwhile, the average of core inflation measures tracked by the central bank remained close to the 3% target. Data tracking for June shows food and beverage price pressures remain elevated, transitorily affected by a road blockage from the road disruptions. We expect a month-over-month inflation of 0.32% (0.15% last year), resulting in annual inflation of 3.48%.


On Friday, the Statistics Institute (INEGI) will announce April’s gross fixed investment, which we expect to decrease 4.0% year-over-year in April (from -2.4% in March). On an annual basis, coincident indicator construction output (-4.1% year-over-year, from -2.5% in March) deteriorated in April, while imports of capital goods (-9.2% year-over-year, from 0.16% in March) contracted sharply.

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