Itaú BBA - Higher-than-expected unemployment rate in Brazil

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Higher-than-expected unemployment rate in Brazil

February 28, 2019

We expect the unemployment rate to slide to 11.8% by year-end and to 11.5% by the end of 2020

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According to the national household survey (PNAD Contínua), Brazil’s nationwide unemployment rate climbed to 12.0% in the quarter ended in January, from 11.6% in December. The reading was in line with our estimate and somewhat higher than the median of market expectations (11.9%). Unemployment is just 0.1p.p. lower than one year earlier, amid weak economic growth. Using our seasonal adjustment, unemployment was stable vs. the previous reading, at 12.3%, 0.2 p.p. above the October 2018 figure.

Looking forward, unemployment rate tends to decline slowly. We expect — under our seasonal adjustment — the unemployment rate to slide to 11.8% by year-end and to 11.5% by the end of 2020.
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Also, the Central Bank released the credit figures for January. In real terms, the daily average of new non-earmarked loans fell 3.9% mom/sa. In the earmarked segment, new loans plummeted 8.5%. Overall delinquency remained stable at 2.9%.
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On fiscal accounts, the central government posted a BRL 30.2 bn primary surplus in January, between our call and market consensus (at BRL 31.8 and 28.7 bn, respectively). Compared to our expectations, revenues came 4.7 BRL bn and expenditures 3.1 BRL bn lower than expected. The former was due to a higher distortion between the federal revenue service tax collection and national treasury revenues, while the latter came from lower discretionary spending.

Central government result will likely be around BRL 35 bn (0.5% of GDP) better than the target for the year (BRL 139 bn or 2.3% of GDP). The loose fiscal target is explained by the government’s conservatism in changing it last year, amid uncertainty over GDP growth this year and lower mandatory and discretionary spending than previously forecasted in the budget. The consolidated primary result for January (including regional governments and state-owned companies) will be released tomorrow. We expect a BRL 45.7 bn surplus.

Day Ahead: At 9:00 AM, IBGE will release 4Q18’s GDP. We expect a zero growth qoq/sa, leading to a 1.1% GDP growth in 2018. Also, January’s consolidated primary budget balance is expected to be released, for which we forecast a BRL 48.8 bn surplus.


Activity declined more than expected in December. The EMAE (official monthly GDP proxy) decreased by 7.0% yoy in December, leading to a 2.6% contraction in 2018, missing our GDP forecast of 2.2% and central bank survey expectations of 2.4% yoy. On a sequential basis, the economy grew 0.7% mom/sa, bringing the quarter-over-quarter contraction to 6.8% (annualized) in 4Q18 (vs. a contraction of 3.2% in 3Q18). The statistical carryover for 2019 is - 3.1%. Indec (official statistics agency) is scheduled to publish the national accounts for 2018 on March 21.

We revised our GDP growth forecast for this year downward. Expected weaker internal demand, due to higher interest rates and the large negative statistical carryover, will likely offset the long-awaited sequential recovery of the economy after a 1Q19 driven by the soy harvest. We now forecast a contraction of 1.2%, vs. 0% in our previous scenario.
** Full story here.


The Central Bank of Mexico (Banxico) published the quarterly inflation report for 4Q18, lowering growth forecasts, while inflation outlook remained broadly unchanged. Economic activity growth forecasts decreased to a range of 1.1-2.1% (from a range of 1.7-2.7% in the 3Q inflation report) and 1.7-2.7% (from 2.0-3.0%) for 2019 and 2020, respectively. In turn, despite recent downward inflation surprises and less demand pressure ahead, inflation forecasts remained broadly unchanged, with the quarterly average annual headline inflation forecast for 4Q19 at 3.4% (unchanged compared to the 3Q inflation report) and 2.7% for 4Q20, while the quarterly average annual core inflation forecast for 4Q19 at 3.2% (from 3.1%) and 2.7% for the 4Q20.

Downside risks for economic activity are high. Among the downside risks to economic activity that the report mention are: trade tensions; high volatility episodes in financial markets; a deceleration of the global economy; a delay in the approval process of the USMCA; a deterioration or lack of improvement in the uncertainty environment, which has been affecting investment; a  downgrade of PEMEX credit rating; and a higher than expected effect on economic activity from gasoline shortages, labor strikes in manufacturing firms in the state of Tamaulipas and the blockade of railways in the state of Michoacán. However, balance of risks for inflation remains tilted to the upside. Core inflation persistence remains one of the main upside risks for inflation.

We expect the central bank to keep the policy rate unchanged throughout this year. The inflation report confirms the Board’s concern of weak economic activity. However, the balance of risks for inflation is tilted to the upside. Thus we believe there is no room for monetary policy easing in the short-term. However, with inflation falling within the target range and growth below potential, the central bank will have room to start a gradual normalization cycle if uncertainty (and, consequently, risks for inflation) diminishes. For now, we work with the assumption that the domestic and external environment will remain noisy during 2019, postponing any monetary easing to 2020.
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On activity, January’s unemployment rate stood at 3.57%, below market expectations (3.60%). With seasonally adjusted figures, unemployment posted a 3.49% rate in January (from 3.56% in December 2018), while the participation rate stood at 59.7% (unchanged from December). Likewise, the labor informality rate, also using seasonally adjusted figures, continues to decrease, posting a rate of 56.3% in January (from 58.8% in December).

On external accounts, the trade deficit narrowed between December and January, with both exports and imports improving somewhat. Monthly trade balance posted a USD 4.8 billion deficit in January, below median market expectations (USD 3.9 billion deficit) – taking the 12-month rolling deficit to USD 14.1 billion (from a deficit of USD 13.7 billion in December). At the margin, the trade deficit improved, as the seasonally-adjusted 3-month annualized measure came in at USD 14.9 billion in January (from USD 16.2 billion deficit in December), with the energy deficit at USD 24.2 billion (from a deficit of USD 25.9 billion) and the non-energy surplus at USD 9.4 billion (from USD 9.7 billion).

We expect the trade deficit to remain broadly stable between 2018 and 2019. On the one hand, lower oil production and the deceleration of the U.S. economy will exert downward pressure on Mexico’s exports. However, uncertainty over domestic policies and over the USMCA approval in US Congress will likely slow internal demand and curb external financing.
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Industrial confidence improved at the start of 2019, reaching the most optimistic January level since 2014. According to think-tank Fedesarrollo, industrial confidence came in at 6.3% (0 = neutral), above the 0% recorded one year earlier (-1.1% in December). Compared to January 2018, there was less pessimism regarding the volume of orders (-15.9% vs. -33.0%), while expectation regarding production in the next quarter gained +5.2pp to 40.1%. Limiting the improvement in confidence were rising inventory levels. According to our seasonal adjustment, industrial confidence recovered 2pp from December to 3.4%. This survey’s special topic was investment in the industrial sector, which showed nearly two-thirds of respondents anticipate investment this year to exceed last year’s levels, in line with the expected activity recovery. Meanwhile, retail confidence remains firmly in optimistic territory at 29.3%, compared to 21.8% one year ago (no change from December). The improvement from last year was explained by enhanced expectations of the economic situation in the coming semester (45.8% vs. 34.0% last year) and the evaluation of the current situation (47.0% from 37.8% in January 2018). Going forward, stable and low inflation along with a mildly expansionary monetary policy would likely support private sentiment, aiding an activity recovery this year to 3.3% from the 2.6% expected in 2018.

Day Ahead: The institute of statistics will release January’s urban unemployment rate at 12:00 PM, which we expect to come in at 13.6% (13.4% one year before). At 1:00 PM, GDP for the final quarter of 2018 will be published. We expected a 2.8% growth in 4Q18. Finally, the coincident activity indicator (ISE) for the month of December will be released at 4:00 PM, for which we expect a stable growth rate of 2.3% yoy.


Day Ahead: At 9:00 AM, the national institute of statistics (INE) releases January’s industrial activity indicators. We expect manufacturing production to increase 0.3% yoy. At the same time, the institute will also publish the national unemployment rate for the quarter ending in January, which we expect to come in at 6.8%.

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