Itaú BBA - Evening Edition – Sharp formal job destruction amid the pandemic in Brazil

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Evening Edition – Sharp formal job destruction amid the pandemic in Brazil

Maio 27, 2020

Since January the publication of CAGED was suspended by de Ministry of Economy due to methodological changes

Talk of the Day


CAGED formal job creation was negative by 241k in March and 860k in April, accumulating -1.1 million jobs in the two months (from 113k January and 225k in February). Seasonally-adjusted (our estimate), the economy lost 212k formal jobs in March and 935k in April. The loss of jobs was widespread among the main sectors, with the service sector taking the biggest hit (as expected), while the agricultural sector remains resilient. The economy has been losing jobs, but the participation rate has also been falling, which creates uncertainty for unemployment rate forecasts. We expect the unemployment rate at 13.5% seasonally-adjusted (13.9% without seasonal adjustment), assuming the participation rate will recede to 60.5% from 61.0%, seasonally-adjusted. If the participation rate remained at its February level (61.8%), the unemployment rate would rise to 15.4% seasonally-adjusted in April. Since January the publication of CAGED was suspended by de Ministry of Economy due to methodological changes.

According to FGV’s monthly survey, industrial confidence advanced 3.2 p.p. in May (to 61.4), after declining 39.3 p.p. in April. This result was slightly better than last week’s preview (+2.4 p.p.), and better than that from the special survey conducted by FGV two weeks ago (-1.2 p.p.). The breakdown shows that this positive result was driven by the expectations component, which increased 5.3 p.p. (to 54.9) after plummeting 46.6 p.p. last month, while the current conditions component increased by 1.2, to 68.6, after registering a 31.4 loss in April. The survey was conducted between May 1st and May 26th, with 974 companies. It is worth mentioning that retail (+6.2 p.p.), consumer (+3.9 p.p.) and construction (+3.0 p.p.) confidence indicators also showed positive results in the month, but are still at a low level.

The governor of São Paulo, João Doria, presented today the reopening plan for the state, which will start on June 1st. The reopening process will follow a 5-phase approach, which will be applied in different moments for each region (the capital, for instance, is currently at phase two), depending on: i) ICU occupation rate for COVID-19 patients; ii) ICU beds for COVID-19/ 100k inhabitants; iii) number of cases, hospitalizations and deaths. In addition to these criteria, the cities should follow the testing requirements established by the State Government to adopt the flexibilization. It will take at least fourteen days before advancing from one phase to the next, and a region may return to a previous stage in case its scenario deteriorates. The reopening process will be combined with social distancing and health measures, such as the use of masks in public locations and capacity limits for businesses that deal with the general public.

Phase one (maximum alert) will relax the restrictions for industries (those that are not currently operating) and the construction sector. In phase two (control), real estate activities, auto dealers, offices, local retail shops and shopping malls will be allowed to operate with restrictions. In phase three (flexibilization), the restrictions for real estate activities, auto dealers and offices will be lifted, while restaurants and beauty salons will be authorized to open with restrictions. Phase four (partial reopening) follows the same rules of phase three, but with the inclusion of other sectors (such as gyms), also with restrictions. In the final phase, theaters, cinemas and public events, such as sports and musical concerts will be allowed to operate, and all the restrictions of the previous phases will be lifted. It’s worth mentioning that the normalization schedule for public transportation and educational activities is not defined yet.

Itaú Daily Activity Index: Our Daily Activity Index has increased slightly by 0.9 p.p. in the last available day (Sunday, May 24th) to 67.1, while the 7-day moving average dropped 0.3p.p., to 72.9. The index is down 33% when comparing the latest data available with the first half of March. See our report here.

Tomorrow’s Agenda: May’s IGP-M inflation will be released at 8:00 AM, for which we forecast a 0.16% monthly increase. The unemployment rate for April will be published at 9:00 AM. We expect the indicator to reach 13.5% seasonally-adjusted (13.9% without seasonal adjustment), assuming the participation rate will recede to 60.5% from 61.0%, seasonally-adjusted. If the participation rate remained at its February level (61.8%), the unemployment rate would rise to 15.4% seasonally-adjusted in April. Additionally, the Central Bank will publish April’s credit report at 9:30 AM. During the day, April’s central government’s balance will also be released, for which we expect a BRL 111.3 bn deficit.


The Central Bank of Mexico (Banxico) published its quarterly inflation report for 1Q20, decreasing sharply its economic growth forecast for 2020 and 2021. Amid the uncertainty around the impact of COVID-19 in economic activity, Banxico published several scenarios which depend on the deepness and duration of the negative shock in GDP, with a V, deep V and deep U scenario. For 2020 and 2021, the central bank expects a GDP of -4.6% and 4.0%, -8.8% and 4.1% and -8.3% and -0.5%, in a V, deep V and deep U scenario, respectively. The quarterly average annual headline and core inflation forecasts for 4Q20 increased to 3.5% (from 3.2% in the last inflation report) and 3.8% (from 3.0%), respectively. According to the report, the upward revisions are due to the still persistence in core inflation, the effect on prices from the depreciation of the currency and a supply shock on prices due to distancing measures amid the outbreak. However, for 2021, the central institute expects a fast deceleration in inflation dragged by the widening of slack conditions.  The quarterly average annual headline and core inflation forecasts for 4Q21 remained unchanged at 3.0% and decreased to 2.6% (from 2.9%), respectively. We expect the policy rate to reach 4.00% at the end of 2020. While the significant widening of the negative output gap support Banxico continuing its easing cycle, a still cautious Board over the inflation outlook and its risks, reflected in higher inflation projections for 2020, means that cuts larger than 50-bps are unlikely. However, a benign inflation scenario for 2021 supports Banxico continuing cutting rates. **Full story here.

Tomorrow’s Agenda: Mexico’s Central Bank (Banxico) will publish the minutes of May’s monetary policy meeting (held two weeks before) at 11:00 AM, in which the Board unanimously voted for a 50-bp cut, reaching a rate of 5.50%. The minutes will shed more light on the discussion between board members over the monetary policy easing pace, amid differences over the balance of risks for inflation.


The trade balance posted a USD 1.4 billion surplus in April, up from the USD 1.2 billion surplus registered in same month of last year. Thus, the last-12-month trade surplus increased to USD 17.5 billion. At the margin, the annualized surplus adjusted for seasonality decreased a tad to USD 15.5 billion in the quarter ended in April, from USD 15.7 billion in 1Q20. Total exports decreased by 13.0% yoy (down from 6.8% yoy in 1Q20). On a sequential basis, exports plummeted by 52.5% qoq/saar (from -45.4% in 1Q20). Total imports declined by 23.4% yoy in the quarter ended in April as activity contraction deepened. At the margin, imports tumbled by 31.1% qoq/saar (-6.8% in 1Q20). The rolling 12-month trade deficit came in at USD 0.3 billion, slightly down from February.  We forecast a surplus of USD 17.5 billion this year, as measures to contain the spread of COVID-19 will take further a toll on activity and imports. **Full story here.

Fiscal deficit increased with the recession and measures taken to mitigate the impact of the lockdowns. The treasury ran a primary deficit of ARS 228.8 billion in April, compared with a surplus of ARS 0.5 billion in the same month of 2019. We estimate that the 12-month rolling primary deficit as of April increased to 2.1% of GDP, from 1.1% in March. The nominal deficit (which includes interest payments) likely reached 5.0% of GDP. Total revenues decreased by 21.8% yoy in real terms in April, dragged down by declining tax collection (-20.5% yoy, adjusted by inflation), as a result of weaker activity and benefits. Also, VAT collection and social security contributions fell 19.1% yoy and 27.2%, respectively. Primary expenditures rose 35.1% yoy in real terms, driven by higher social security expenses, especially in bonus payment to workers and food cards. Energy and transportation subsidies rose 76.9% yoy in real terms due to frozen tariffs, while transfers to provinces grew a hefty 517.9% yoy. We expect fiscal accounts to continue to deteriorate in 2Q20. Weak activity will take a further toll on tax collection, while fiscal expenditures will continue to reflect higher social transfers. We forecast a primary deficit of 4.3% of GDP for this year, from 0.4% in 2019. However, we note that risks remain tilted to the downside (i.e., a higher deficit). **Full story here.


During the month of April, both industrial and retail sentiment remained deep in pessimistic ground and broadly unchanged from the previous month, hinting that the impact of the coronavirus shock had already been fully internalized. According to think-tank Fedesarrollo, industrial confidence came in at -35.8% (0 = neutral), recording a new historical low, and well below the +4.4% posted one year earlier (yet similar to -35.0% in March). Compared to last year, industry is experiencing far inferior order numbers (-58.2% vs. -14.4%), leading to rising inventory. Meanwhile, expectations for production in the upcoming quarter worsened to -19.7% from +33.8% one year earlier, reflecting the unfavorable growth outlook (yet it is worth noting that expectations were less downbeat that the -43.3% in March). The survey also shows that 86.4% of respondents mentioned that COVID-19 crisis is affecting the normal functioning of business activity. Meanwhile, retail confidence remained low at -25.5% in April (+29.7% last year), but did rise from the historical lowest level of -30.8% recorded in March. Compared to April 2019, retail sentiment dropped 55.2 pp as the outlook for the economic situation in the upcoming semester sharply declined to -35.7% (from +49.7%) and current dynamism of sales dropped to -31.4% (from +44.0%). The mild improvement at the margin once more came from the expectations component. Overall, strong headwinds from weak global growth, low oil prices and extensive domestic lockdown measures will lead to an activity contraction of 4.7% this year (+3.3% last year), supporting our call for additional monetary easing by the central bank.


The University of Chile’s quarterly employment survey of greater Santiago shows an unemployment rate rising significantly in 1Q20 on the back of the disruption from social unrest in 4Q19 and the consolidation of the coronavirus shock in March. The unemployment rate came in at 15.6%, 8.0pp higher compared to 1Q19 (and is the highest 4Q print since 2009), reaching the highest rate since 1985. According to the national statistics agency’s greater Santiago survey for 1Q20, the unemployment rate was a much milder 8.7% (+1.2pp over one year). Nevertheless, with the economy hardest hit by the virus during 2Q20, the labor market is expected to continue to loosen. The rising unemployment rate came despite a significant drop in the participation rate (-5.1pp from 1Q19) as employment shrunk a significant 15.5% yoy (0.1% drop in 4Q19). Job destruction was pulled down by the 12.3% drop in salaried employment (-1.2% previously), while self-employment posts declined by 21.7% yoy (+7.2% previously). Job destruction was led by commerce (23.3% drop) and construction (22.0% fall), while manufacturing was the only sector that posted job gains (+1.4% yoy; likely due to the rotational lockdown measures not significantly affecting manufacturing zones during March). The significant loosening of the labor market along with suppressed private sentiment would drive a 3.7% GDP decline this year (+1.1% in 2019).  

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