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Unemployment remains high in Brazil

June 3, 2019

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

Talk of the Day

Brazil

The national unemployment rate reached 12.5% in April, 0.1 p.p. above our forecast and in line with market expectations. Compared to the same month of 2018, the indicator declined 0.4 pp. Seasonally adjusted, the unemployment rate receded 0.1 pp to 11.9%, as the employed population increased 0.3% mom in the month, while the participation rate increased to 61.9% (from 61.8% in March). The real wage bill advanced 2.8% yoy and 0.8% on a quarterly basis. Despite April’s result, the current level of the overall business confidence indicates a downside bias for formal jobs creation going forward, while the seasonally adjusted unemployment rate is expected to remain virtually stable throughout the year.
** Full story
here.

The consolidated public sector posted a primary surplus of BRL 6.6 billion in April, beating our call (BRL 2.8 billion) and in line with market consensus (BRL 6.6 billion). The central government had a surplus of BRL 6.5 billion (vs. our BRL 5.4 billion estimate), driven by lower mandatory expenditures. Regional governments posted a surplus of BRL 0.7 billion and state-owned companies showed a deficit of BRL 0.2 billion, which were both better than anticipated. The consolidated primary deficit over 12 months remained at 1.4% of GDP, matching the March print. In our view, meeting the public sector’s annual primary deficit target of BRL 132 billion requires discipline, but shouldn’t be challenging, especially in case of a successful oil auction from the transfer-of-rights area (cessão onerosa), expected to October, which could improve this year’s primary result by about BRL 52 billion (0.7% of GDP). The general government’s gross debt increased to 78.8% of GDP in April (from 78.5% in March).
** Full story
here.

Day Ahead: May’s trade balance will be released at 3:00 PM, for which we expect a USD 6.2 bn surplus, above the USD 6.0 bn observed in the same month of last year. In month-over-month terms, exports are set to recede 0.4%, while imports will likely remain stable.

Chile

Despite improved mining, activity was weak in April. As expected, mining posted some improvement in the month, as the effects of adverse weather and a high base of comparison fade, but primary sector-related manufacturing activity was a key drag in the month (continuing the trend that unfolded in 1Q19 GDP). Mining production bounced back with growth of 2.6% in April (-3.7% in March), while utility activity continued to advance. Industrial production grew 0.7% yoy in the month (-0.8% in March), the first rise posted this year. The 1.4% yoy drop of manufacturing activity (+1.4% in March) hampered growth, well below the market consensus of 0.3% growth and our +0.2% forecast. After adjusting for calendar effects, the drop was a milder 0.2% (+0.3% in March). The manufacturing decline was the first such case since November last year. At the margin, industrial production fell 3.8% qoq/saar (similar to the performance in 1Q19), a slowdown from the 3.7% rise in 4Q18. Overall, the industrial production data, along with our expectation of weak retail activity in the month, suggest that the GDP proxy grew 1.9% in April, similar to March’s performance. Activity has been sluggish so far this year, while an increasingly complex external scenario is affecting Chile’s outlook. For 2019, we see activity decelerating to 3% (from 4% for 2018).
** Full story
here.

The labor market showed mixed signals in the quarter ended in April, as unemployment increased slightly and job growth accelerated. While April’s unemployment rate came in a tick above expectations (at 6.9%) and 0.2pp above the rate 12 months earlier, job creation accelerated, lifted by formal and self-employment. Despite the labor force growth growing 0.4pp (to 1.5%), participation continued to fall from last year (-0.2pp, to 59.6%), showing the labor market recovery is coming with a lag. Complementary labor data (pension contributions) is consistent with the favorable trend of formal job posts that, along with recovering wage growth, could shield consumption ahead. The creation of jobs grew at the fastest pace since July 2018. As headwinds to Chile’s economic outlook pick up, it is unlikely the unemployment rate would narrow significantly from the 7% recorded last year.
** Full story
here.

Day Ahead: At 10:00 AM, INE will publish the private consumption activity indicators for April. Still-low consumer sentiment and falling new car sales point to retail sales contracting 0.3% in April.

Colombia

The national unemployment rate came in at 10.3% in April, up 0.8pp over twelve months, driven by rises in both the urban and rural joblessness. The urban unemployment rate came in at 11.1% (10.7% one year ago), below the 11.5% market consensus and our 11.4% estimate. A notable drop in the participation rate contained the rise in the unemployment rate in the period. Fewer jobs were registered this year, primarily due to falling self-employment. Jobs were shed (-3.4% yoy) at the fastest pace since the financial crisis. Meanwhile, in the quarter ending in April, total employment fell 0.7% yoy (-0.1% in 4Q18), resulting in the unemployment rate rising 1.1pp over twelve months to 11%. The one positive from the data is that formal employment continued to rise in the month. Still, falling participation and overall job shedding does not bode well for consumption dynamism ahead. As the labor market performance underwhelms, the unemployment rate is set to rise for the fourth consecutive year (to 10.2% from 9.7% for 2018).
** Full story
here.

The board of the central bank held a meeting that focused on technical aspects other than the policy rate (the second of four scheduled for the year), in which the board suspended the accumulation of reserves. In an environment of notable depreciation of the Colombian peso and the IMF’s reassurance that Colombia remains eligible for a flexible credit line, the board suspended the accumulation of reserves, in order to analyze future developments of the exchange rate (no further details provided in the press release). On September 28, 2018, Colombia started a reserves accumulation program ahead of a possible reduction in its flexible credit line (amounting to close to USD 11.4 billion) with the IMF from 2020. To date, the central bank purchased close to USD 2.9 billion (including USD 1bn purchases from the Treasury in February). Given the recent depreciation of the COP, no options were executed in May, as the price condition (official spot price below the 20-day moving average) was not triggered. Colombia’s large twin deficits make it vulnerable to sudden tightening of global financing conditions, another justification to build on its base of international reserves (which sit at USD 51.5 billion or 17% of GDP).

The Week Ahead in LatAm

Argentina

On Tuesday, the central bank will release its monthly expectations survey. In the latest survey, analysts raised their inflation forecasts for 2019 (to 40.0% from 36.0%) and for 2020 (25.2% from 23%).

Manufacturing and construction data for April will see the light on Wednesday. We expect to see another year-over-year drop in manufacturing activity (-13.4% in March). According to the IPI (an index published by OJF consulting firm), manufacturing fell 6.3% in April but grew 2.3% relative to March (SA). Construction activity also contracted in April according to private indicators like Grupo construya index (-17.1% yoy), but also improved on sequential basis from the previous month (3.7%). 

Also on Wednesday, the car-makers association (ADEFA) will release May data on production, exports and domestic sales to car dealers. Auto production fell 33.9% yoy in April and domestic sales plummeted 60.9% yoy affected by the depreciation of the peso and high interest rates, while exports rose 3.2% yoy. 

Brazil

May’s IPCA inflation will be released on Friday. We forecast a 0.20% monthly increase, leading the 12-month reading to 4.74% (from 4.94% in April). Food at home will likely post a negative contribution (-1.05%) in the month, after increasing 0.62% in April.

On economic activity, next week’s highlight will be April’s industrial production, to be released on Tuesday. We forecast a 0.2% increase on seasonally adjusted terms, after a 1.3% decline in the previous month. Two indicators related to May’s industrial production will also come in: Anfavea auto production (Thursday) and Fenabrave vehicle sales (without a specific date).

May’s trade balance will be released on Monday, for which we expect a USD 6.2 bn surplus, above the USD 6.0 bn observed in the same month of last year. In month-over-month terms, exports are set to recede 0.4%, while imports will likely remain stable. Over 12 months, we expect the trade balance to increase slightly to USD 57.3 bn (from USD 57.0 bn), while the SAAR three month moving average increases to USD 53.0 bn, from USD 50.7 bn.

Finally, the market will remain focused on the news flow about the pension reform in the special committee and the developments of the government’s articulation with the Congress.

Chile

On Monday, INE will publish the private consumption activity indicators for April. Retail activity remained weak in March with sales including vehicles up 0.7% over twelve months (+0.1% in February). Meanwhile, wholesale trade continued to drive commercial activity, as sales of investment-linked materials (machinery, equipment and construction materials) remain robust. Still-low consumer sentiment and falling new car sales point to retail sales contracting 0.3% in April.

On Wednesday, the central bank will publish the GDP proxy (Imacec) for April. The Imacec increased 1.8% yoy in March (1.4% in February), as mining once more led the drag (contracting for the third consecutive month), while services was still driving the rest of the economy. Sectorial data showed some improvement of industrial production, while retail activity remained subdued. Overall, we expect the monthly GDP proxy (Imacec) to grow 0.4% (SA) from March and result in annual growth of 1.9% (NSA) in April.

Nominal wage growth for April will be released on Thursday. Wage growth in March posted a strong 4.8% yoy (4.3% previously), resulting in a real wage expansion of 2.3% (2.1% in February). Signs of a wage growth recovery, along with low inflation (expected to stay below the central bank’s 3% target this year) and an expansionary monetary policy, would shield consumption ahead.

On Friday, inflation for the month of May will be released. Inflation came in line with expectations in April, remaining stable at 2% and affirming that inflationary pressures remain contained. Meanwhile, the core measure (excluding food and energy prices) sits at a lower 1.9%. High frequency price tracking points to consumer prices rising 0.5% from March (0.3% last year), lifted by electricity tariffs, gasoline prices and air transportation prices ahead of winter vacations. As a result, annual inflation would edge up to 2.3%.

The central bank will publish the trade balance for the month of May on Friday. Another trade surplus was registered in April, yet the sixth consecutive month of contractions for mining exports has led to further narrowing of the rolling 12-month balance (to USD 3.5 billion versus USD 4.7 billion in 2018 and USD 7.4 billion in 2017). We expect a trade surplus of USD 500 million in May (USD 415 million one year earlier), with still weak mining exports being offset by robust industrial exports and slowing durable consumption and capital import growth.

On Friday, the central bank will announce its final monetary policy rate decision before publishing the 2Q19 Inflation Report (IPoM) the following week. With the IPoM set to communicate any potential change in the baseline scenario for the policy rate trajectory, we expect a unanimous decision to hold the policy rate at 3%. Nevertheless, the press release could highlight growing concerns over the international scenario and its impact on the domestic economy. 

Colombia

The institute of statistics (DANE) will publish exports for the month of April on Tuesday. Total exports fell 0.8% year over year in March (+6.2% in February), as oil exports accelerated to double-digit rates (as both volumes and prices recovered), but was unable to fully offset the coal and coffee declines. We expect April exports to come in at USD 3.5 billion, a 8.8% yoy drop as coal exports remain a key drag.

Inflation for the month of May will be released on Wednesday. April annual inflation accelerated to 3.25% from 3.21% in March. Average core inflation remained low in April at 2.95% (2.82% previously), near the 3% target. Data tracking for May shows food and beverage price pressures remain elevated. We expect a month-over-month inflation of 0.34% (0.25% last year), resulting in annual inflation of 3.34%.

Mexico

On Sunday, six states in Mexico will hold local elections (Congresses, mayors and two governorships). Morena’s candidates for governor in the states of Puebla (support of 54% versus 38% for the closest competitor) and Baja California (support of 50% versus 16% for the closest competitor) hold a comfortable margin. Morena is also expected to win elections in local congresses, giving them majorities in 22 out of 32 local congresses (from 19 currently). Assuming results are as expected, AMLO’s political power will strengthen.

On Thursday, the Statistics Institute (INEGI) will announce March’s gross fixed investment, which we expect to decrease 3.1% year-over-year in March (from -1.9% in February). On an annual basis, coincident indicators, construction output (-2.9% year-over-year, from -1.0% in February) and business confidence (-5.3% year-over-year, from -3.3% in February) deteriorated in March. Meanwhile, imports of capital goods (0.2% year-over-year, from -5.5% in February) improved slightly, but grew at a weak pace.

Ending the week, INEGI (the statistics institute) will publish CPI corresponding to the full-month of May, which we expect to fall by 0.22% month-over-month (from -0.16% a year ago), pulled down by a sharp decline in electricity prices due to seasonal “summer” subsidies to electricity tariffs. The monthly figure will also reflect some pressure form chicken prices as local production decreased amid avian flu outbreaks (government already raised import quotas to offset supply shortages). Assuming our forecast is correct, headline CPI would decelerate slightly to 4.35% year-over-year (from 4.41% in April).

Peru 

On Sunday, the statistics institute (INEI) will announce May’s CPI, which we forecast to fall by 0.07% month-over-month. Assuming our forecast is correct, headline inflation would post 2.5% year-over-year in May (from 2.4% in April).



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