Since the beginning of the second quarter, a succession of economic releases has confirmed the view that Brazil’s Chinese-style pace of growth in the first quarter was atypical, and not to be counted on in the medium to long term. The 11.2% QoQ (SAAR) expansion was influenced by a still-low comparison base (in 4Q09 the economy was still running below the pre-crisis peak), as well as consumers bringing forward purchases given the imminent end of tax breaks. Since March, however, economic activity has faltered, with no evident expansion at the margin. In fact, retail sales and industrial production in June were respectively 0.6% and 2.1% below the March peak.
Nevertheless, companies have continued to hire more and pay their employees more. The latest release of IBGE’s monthly employment survey shows that the Brazilian labor market, in aggregate terms, remains as strong as if all government stimulus policies were still fully in place. Unemployment fell to 6.9% in July (the third lowest rate ever), with the share of the working age population (in Brazil, over the age of 10) reaching 53.2%, second only to October 2008’s 53.4% peak. And all that with rampant real wages, which in July were up 5.1% YoY, reaching R$1,452.50 and representing a 5.1% YoY increase. Combined, the wage and occupation gains resulted in an 8.4% YoY increase in the real wage.
One could argue that the labor market reacts to macroeconomic movements with a lag (for instance, following the late-2008 crisis, employment bottomed only in April 2009), and thus there has not yet been time for companies to adjust their plans to less growth in the post-stimulus stage of the Brazilian economy, besides staggered wage adjustments due to union agreements. However, it is possible to assert that this post-stimulus stage of the Brazilian economy has yet to come. Indeed, even though tax breaks on consumer goods are in the rearview mirror, there is still a major official push in the economy, directly connected to the labor market’s good performance.
Mortgage loans outstanding were up 51% YoY in July, reaching R$119bn, of which R$110bn refers to loans at subsidized rates funded by earmarking of savings account deposits. Of this R$110bn, R$87bn was granted by state-owned banks. The government-induced housing boom explains most of the Brazilian labor market’s good performance. Employment in the sector grew 6.3% YoY in the 12-month period through July, while real wages grew an impressive 10.7% YoY. However, excluding that booming sector, the labor market’s performance is not that eye-catching: the 2.0% YoY expansion in occupation is good, but lower than what was posted in other periods of GDP growth, such as 2004 or 2007. Furthermore, the 1.3% YoY expansion in real wages (also in the 12-month period through July) is actually the lowest since 2005!
With no increase in savings in the Brazilian economy, but with the government pushing demand for investments, the favored sector is bidding up prices of resources (wages, in this case). Higher wages are not necessarily a concern as regards inflation. It may be the outcome of productivity gains boosting economic growth, with workers having their share in the form of higher salaries. The situation is more complicated when it is credit that is pushing the process. So far, this strong monetary demand has been prominently concentrated in the construction sector. Thus, there has been change in relative prices and not generalized CPI inflation (real wages in manufacturing, for instance, grew a paltry 0.3% YoY in the 12-month period through July, despite an 8% YoY gain in productivity).
Only more productivity and savings result in sustainable growth. Trying only to push demand inevitably leads to inflation. However, this should not be the case in the medium term given the expected moderation in another important source of stimulus (BNDES) next year. Nevertheless, if the strategy of pushing demand without improving supply conditions (i.e., making structural reforms) continues, higher interest rates will be inevitable if inflation is to remain subdued.
Chief Economist – Bradesco Corretora