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Back to Reality: The Numbers Don’t Lie

Written by Armando Castelar.

With the end of Carnival, this week in Brazil one gets a sense that the year is finally speeding up: more cars on the street, congressmen bickering about who will be party leader, the Supreme Court finally moving forward with pending cases ... It was also a busy week regarding economic surveys and studies. The story they tell is not a pretty one.

On Thursday, the Central Bank released its estimate for the IBC-BR -- a monthly indicator the monetary authority uses to track the level of economic activity -- in December 2015. Although the IBC-BR does not intend to replicate the official GDP, it is a good proxy for it (Figure 1). Based on a simple regression between the two indicators (more detail here), we infer that in the fourth quarter of 2015 GDP contracted 4.8% YoY and 0.4% QoQ (seasonally adjusted). This translates into a 3.6% contraction of GDP in 2015. This is slightly better than the median financial market forecast (-3.8%) and our own prediction at IBRE (-3.7%).

Figure 1: YoY Variation of Quarterly IBC-BR and GDP (%)

20160221 Figure 1

Sources: IBGE and Central Bank.

Also on Thursday, the OECD released its Interim Economic Outlook for the world economy, cutting down global growth forecasts. In the report, it significantly slashed its projections for Brazil’s GDP, which it now predicts will contract by 4.0% in 2016 and stagnate in 2017, after declining 3.8% in 2015. These compare to the IMF’s forecasts of negative growth of 3.5% in 2016 and also zero change in 2017. If the OECD is right, per capita GDP will have dropped a total 10.5% in 2014-17, going back to the level first reached in 2008!

This week IBGE released two surveys that showed a mixed impact of the fall in economic activity on the labor market. On Friday, the Continuous National Household Survey (PNAD-C) showed that, on average, in Sep-Nov/15 the unemployment rate climbed to 9.0%, up from 6.5% a year before. The survey reinforced two stylized facts about the reaction of the labor market to Brazil’s great recession that will probably extend into 2016:

[1] The number of unemployed is quickly increasing: YoY, a rise of 41.5%, or 2.7 million more people. Yet, employment levels have barely changed: YoY, employment fell 0.6%, with the elimination of 0.5 million jobs. Thus, unemployment is going up because more people are entering the labor force. Although to some extent counterintuitive – why look for a job exactly when it has become harder to find one? – this behavior is consistent with the hypothesis that high levels of household debt and stagnant incomes are pressuring households to seek other sources of income to make ends meet.

[2] The mean quality of jobs has deteriorated, although with only a modest impact on average real earnings: these declined 1.3% for all workers, with a 1.6% contraction for those in the private sector. Focusing on the latter, we see two different stories unfolding. On the one hand, there was a 3.1% YoY (-1.1 million jobs) fall in the number of formal employees, who, however, managed to protect their earnings from inflation (a +0.3% real gain YoY). On the other hand, the number of workers self-employed or in domestic help jobs soared by 4.3% (+ 1.1 million jobs), while their real earnings contracted 5.1% YoY.

Although representative of the overall labor market, the PNAD-C dates back to only 2012, so it does not allow for longer-term comparisons. Also last week, though, IBGE released the Survey on Industrial Employment and Salaries (PIMES), which goes back to late 2000. The PIMES makes clear that, for industry at least, the blunt of the adjustment in the formal labor market has fallen on declining employment and hours worked, with still relatively minor impact on real earnings per hour (Figure 2).

Figure 2: Index numbers for hours paid and real hourly wages in industry

20160221 Figure 2
(12-month moving average, Dec 2001 = 100)

Source: IBGE.

A busy week would not be complete without news on the challenging fiscal front. Indeed, on Thursday S&P downgraded Brazil’s credit rating one more notch below investment grade, keeping a negative outlook. On Friday the government announced a number of initiatives in fiscal policy, the most noteworthy of which was asking Congress to allow for the federal government to run a primary (i.e., before interest payments) budget deficit of 1.0% of GDP in 2016, down from its previous target of a 0.5% of GDP surplus. Do not be surprised if this target is revised south at least once more this year.

The shows of smoke and mirrors that usually accompany the announcement of new policy measures will do little to stem Brazil’s downward spiral, as highlighted by S&P’s decision this week. Moreover, the longer the government takes to act, the more physical and human capital will be destroyed, further complicating an eventual economic recovery, when it comes. We can only hope that, without the distraction of vacations and carnival, Brazilians will start to demand better policies from the government.

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