Brazil Economic Weekly

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1 Macroeconomic Research Department Macroeconomic Research Department Brazil Economic Weekly June 26 th 2015 Comments on the disparity in the activity indicators and the deterioration of the job market Igor Velecico It is worth noting the moderate disparity between first-half activity indicators and annual estimates. While GDP (according to the latest figures) looks set to fall by 1.7% in 2015, indicators such as formal job creation (as measured by Caged employment registry) and the IBC-Br (economic activity indicator measured by the Central Bank) are pointing to a bigger decline. The upturn in unemployment is not due to the increase in the economically-active population (EAP), but rather to the reduction in job creation. Some economic agents have attributed this tendency to the return of workers to the EAP, reflecting the worsening of the job market in more precise terms, the EAP has been growing at around 1% per year since May We totally disagree with this interpretation. We are not disputing the fact that the weakening of the job market can lead to an increase in the EAP this makes perfect sense. The point is that if this was already occurring, the EAP should be growing at much more than 1%, and not at the rate suggested by the demographics. This therefore reinforces the defining role of reduced occupation in the upturn in the unemployment rate. Resolution of the Greek crisis should give an additional boost to European activity in the second half Felipe Wajskop França BRAZIL ECONOMIC WEEKLY The pace of Europe s economic recovery stabilized in the first half, with a certain amount of moderation in the last three months, partially due to the weakening of exports and, more recently, the slowdown in consumption and the impact of the uncertainties in relation to Greece s future on the confidence of the economic agents. Given that we expect a solution for the Greek impasse in the next few days, albeit a provisional one, the improvement in confidence should favor an economic upturn in Europe in the second semester. The expected second-half recovery of the U.S. and Chinese economies and the additional depreciation of the euro (we expect near parity with the dollar by year-end) will favor European exports. In addition, the ECB s monetary stimuli and the gradual improvement in jobs and credit should fuel consumption and investments. Consequently, we expect European GDP to expand by 0.7% in the first half of 2015 and 1.1% in the second, growing by 1.5% in the year as a whole. 1

2 Comments on the disparity in the activity indicators and the deterioration of the job market Igor Velecico This text is divided into two parts, the first of which deals with the moderate disparity between first-half activity indicators and annual estimates. In the second part, we show that the increase in unemployment is not due to the upturn in the economically-active population (EAP), but to the decline in job creation. Part 1 Disparity between the activity indicators The economic activity figures in 2015 will show an uncommon disparity by historical standards. While GDP (according to the latest figures) looks set to fall by 1.7% in 2015, indicators such as formal job creation (as measured by Caged employment registry) and the IBC-Br (economic activity indicator measured by the Central Bank) are pointing to a bigger decline. Clearly, it is not the intention of market analysts (nor should it be) to question which figures are correct and which incorrect, but to establish a thermometer for taking the economy s temperature. And the most common such thermometer is GDP as disclosed by the IBGE (Brazilian Institute of Geography and Statistics). Título Now that our intention is clear, it is important to note the following premises for the exercise. (i) We will be using actual and projected figures for the first half and have assumed stability thereafter; (ii) In the case of GDP, we estimate a 1.1% decline in the second quarter and a revision of the firstquarter variation from -0.2% to -0.5%; (iii) In the case of the IBC-Br, we expect stability in May and a slide of between 0.5% and 1.0% in June; (iv) In the case of the Caged, we have only compiled actual figures through May and then translated to what would be compatible with GDP. The assumptions are important because we only want to mark to market the difference in the first-half activity thermometers. In this simulation, for example, 2015 GDP falls by 1.4%; in our official estimate it falls by 1.7%, due to an additional 0.4% decline in the third quarter. The results are as follows: In the case of the IBC-Br, the simulation suggests a downward difference of around 1.5 p.p. in relation to GDP, i.e. while GDP looks set to fall by 1.4% in 2015, the IBC-Br is pointing to a bigger decline of 2.9%. As can be seen from the graph below, this disparity is not far from the historical one, although slightly above the 1.4% ceiling established in Domestic Outlook 8,5 6,5 4,5 2,5 0,5-1,5-3,5 4,3 0,6 3,3 1,3 6,6 6,4-1,3-2,7 8,8 7,6 IBC-Br 12 months GDP 12 months Dec-00 Mar-01 Jun-01 Sep-01 Dec-01 Mar-02 Jun-02 Sep-02 Dec-02 Mar-03 Jun-03 Sep-03 Dec-03 Mar-04 Jun-04 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Sep-15 Dec-15 1,8 0,6 3,4-0,7-1,7-1,4-2,9 Simulation of the variation in the 12-month IBC-Br and GDP, with projections until 2Q15 and assuming stability in 3Q15/4Q15, BCB 2

3 The Caged figures, however, are pointing to a completely different scenario. In previous editions, we have highlighted the Caged s importance as an activity thermometer, including its anticipation of the strong surge in GDP in 2011, when the official figures were subsequently subjected to a substantial Título upward revision. Our model, which relates GDP and the Caged indicator, illustrates this point. It is worth noting that the ratio between the two appears to be reasonably stable and precise between 2003 and As of 2015, however, the Caged figures suggest a more-than-5% slide in GDP, well below the actual numbers and those suggested by the IBC-Br. 7,1 5,4 7,9 6,1 9,6 5,8 GDP (y-o-y) GDP suggested by Caged 10,0 8,0 6,0 GDP (year-on-year variation) and as suggested by Caged 3,6 4,0 0,8 2,2 0,5 1,7 0,6 2,0 0,0-0,6-1,5-2,0-3,0-4,6-4,0 Jan-03 Jun-03 Nov-03 Apr-04 Sep-04 Feb-05 Jul-05 Dec-05 May-06 Oct-06 Aug-07 Jun-08 Nov-08 Apr-09 Feb-10 Dec-10 May-11 Oct-11 Aug-12 Jun-13 Nov-13 Apr-14 Feb-15 Jul-15 Dec-15-6,0, MTE Domestic Outlook There are several possible explanations for this: (i) for some reason, the ratio has ruptured and both the Caged and GDP figures will have different trajectories from now on; (ii) due to prospects of a future economic recovery, companies did not lay off as many workers as they should have in 2014 and it is now necessary to catch up and ensure that employment levels are compatible with GDP growth; and (iii) due to noneconomic events, sector lay-offs are weighing more on the Caged indicator than on GDP. In fact, there is a certain amount of evidence pointing to (ii) i.e. that many companies postponed their lay-offs in 2014, expecting that the economy would improve this year. However, from the point of view of the Caged/ GDP model, this must necessarily have led to a GDP suggested by Caged well above actual GDP in 2014, which were not shown by the figures. In the case of explanation (iii), non-economic events are in fact weighing on job creation and GDP. However, our estimates suggest that this decline represents 25% at most of the change in the level of job creation between 2014 and In addition, as the idea is to measure the temperature of the economy in the first half, it is important to include both economic and non-economic events when evaluating the figures. Finally, we can take one more fact into consideration, which we believe makes sense: the official GDP figures will almost certainly be revised downwards in 2015 so that part of the mismatch will be eliminated. What will this revision mean for GDP? We believe it will be close to the IBC-Br dynamic, i.e. downward revisions of around 1% in the first quarter and close to 2% in the second, giving an annual decline of around 2.5% (assuming relative stability in the third and fourth quarters). Below, we show the (pure) annual projection of GDP as suggested by the Caged figures, assuming that net job eliminations (as registered by Caged), currently around 150,000 per month, will level off at around 50,000 per month as of June. Even if these numbers converge towards zero as of June, they will still be projecting a decline of 2.0%, below our own projection of -1.7%). But are the Caged figures likely to converge towards zero in the near future? According to the Getulio Vargas Foundation s industrial confidence numbers through June (next graph), this looks unlikely. 3

4 8,0 6,0 4,0 2,0 4,4 4,3 3,2 4,0 5,7 6,0 5,2 5,0 3,6 7,6 7,6 5,6 3,9 3,0 GDP as suggested by Caged Annual GDP 2,7 2,4 1,8 GDP (annual variation) and as suggested by Caged (assuming the elimination of an average of 50,000 jobs per month by year-end) 0,0-0,2 0,6 0,2-2,0-1,6-4, Título ,0 2015, MTE Balance of the generation of officially registered jobs and expected industrial confidence ,6 111, , , ,9 100,0 120,0 110,0 100, ,1 90, ,9 80,0 Source: FGV, MTE Caged - seasonally-adjusted series Industrial confidence (FGV - expectations) 72, Dec-02 Mar-03 Jun-03 Sep-03 Dec-03 Mar-04 Jun-04 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 70,0 65, ,0 Part 2 Contribution of the return of people to the EAP to the upturn in unemployment The deterioration in the job market became more accentuated as of the second half of 2014 due to the clearer Fonte: IBGE reduction in economic activity. Since then, Elaboração: Bradesco unemployment (seasonally-adjusted) has increased from 4.8% to 6.3%. Some economic agents have attributed this tendency to the return of workers to the EAP, reflecting the worsening of the job market in more precise terms, the EAP has been growing at around 1% per year since May NÍVEL DESSAZONALIZADO DA POPULAÇÃO ECONOMICAMENTE ATIVA (PEA) - MIL PESSOAS EAP seasonally adjusted (thousands of people) Domestic Outlook Oct-05 Aug Jun-07 Nov-07 Apr-08 Feb Dec-09 May-10 Oct-10 Aug-11 Jun-12 Nov-12 Apr-13 Feb-14 Dec-14 May-15 4

5 We totally disagree with this interpretation. We are not disputing the fact that the weakening of the job market can leads to an increase in the EAP this makes perfect sense. FONTE: IBGE The point is that if this was already occurring, ELABORAÇÃO: BRADESCO (PIA) the EAP should be growing at much more than 1%, and not at the rate suggested by the demographics. TAXAS DE CRESCIMENTO DA POPULAÇÃO TOTAL E DA POPULAÇÃO EM IDADE ATIVA It is always wise to remember that Brazil s population is growing and that demographic changes take years or decades to become effective. At least until 2020, Brazilian demographics will continue to generate an increase in the economically-active age group (EAAG) of more than 1%. 3,5% 3,0% 2,9% 2,6% 2,5% 2,4% 2,0% 2,0% 1,5% 1,0% 0,5% 0,0% -0,5% 1,6% 2,3% 1,4% 1,0% 1,2% 0,0% Total population EAAG 0,1% -0,3% Total population growth rate and growth rate of the economically active age group (EAAG) -1,0% -0,8% -1,0% -1,5% Finally, the participation rate (EAP/EAAG) in the IBGE s monthly employment survey (PME) and continuous national household sample (PNAD) has remained stable in recent months, as much for the total figures Taxa de participação PME vs PNADc as for young and older people. No category shows an abnormal increase in the EAP, reinforcing the defining role of reduced occupation in the upturn in the unemployment rate. 58,5 58,0 57,5 57,0 57,3 PME Continuous PNAD 57,1 57,0 57,3 57,4 61,6 57,6 61,4 57,3 61,2 61,0 60,9 62,0 61,5 61,1 61,0 60,5 Participation rate of the Monthly Employment Survey (PME) and Continuous National Household Sample Survey (PNAD) 56,5 56,4 56,0 55,5 56,7 56,6 56,3 May-06 Jul-06 Nov-06 May-07 Jul-07 Nov-07 May-08 Jul-08 Nov-08 Jan-09 May-09 Nov-09 Jan-10 May-10 Nov-10 Jan-11 May-11 Jul-11 Nov-11 May-12 Jul-12 Nov-12 May-13 Jul-13 Nov-13 Jan-14 May-14 Nov-14 Jan-15 May-15 56,7 56,8 56,6 56,2 55,6 60,0 56,0 59,5 18 a 24 59,0 Domestic Outlook Participation rate of the PME: year-olds 73,0 72,0 71,0 70,0 69,0 68,0 67,0 66,0 65,0 64,0 63,0 70,6 68,4 72,7 70,1 72,2 68,6 May-05 Jul-05 Sep-05 Nov-05 Jan-06 May-06 Jul-06 Nov-06 May-07 Jul-07 Nov-07 May-08 Jul-08 Nov-08 Jan-09 May-09 Nov-09 Jan-10 May-10 Nov-10 Jan-11 May-11 Jul-11 Nov-11 May-12 Jul-12 Nov-12 May-13 Jul-13 Nov-13 Jan-14 May-14 Nov-14 Jan-15 May-15 70,9 68,3 70,1 70,5 67,1 68,4 65,5 64,2 66,2 64,3 5

6 6 Domestic Outlook Participation rate of the PME: year-olds Participation rate of the PME: over-50s 78,2 79,0 79,8 78,7 80,6 81,0 79,6 81,2 80,4 80,6 81,1 82,1 82,1 80,8 81,9 81,4 81,2 78,0 78,5 79,0 79,5 80,0 80,5 81,0 81,5 82,0 82,5 May-05 Jul-05 Sep-05 Nov-05 Jan-06 May-06 Jul-06 Nov-06 May-07 Jul-07 Nov-07 May-08 Jul-08 Nov-08 Jan-09 May-09 Nov-09 Jan-10 May-10 Nov-10 Jan-11 May-11 Jul-11 Nov-11 May-12 Jul-12 Nov-12 May-13 Jul-13 Nov-13 Jan-14 May-14 Nov-14 Jan-15 May a 49 38,6 37,3 39,4 37,7 38,9 40,0 39,0 40,6 39,3 41,1 39,4 41,7 39,0 39,9 38,3 39,2 39,0 36,0 37,0 38,0 39,0 40,0 41,0 42,0 May-05 Jul-05 Sep-05 Nov-05 Jan-06 May-06 Jul-06 Nov-06 May-07 Jul-07 Nov-07 May-08 Jul-08 Nov-08 Jan-09 May-09 Nov-09 Jan-10 May-10 Nov-10 Jan-11 May-11 Jul-11 Nov-11 May-12 Jul-12 Nov-12 May-13 Jul-13 Nov-13 Jan-14 May-14 Nov-14 Jan-15 May-15 x 0,01 50+

7 Resolution of the Greek crisis should give an additional boost to European activity in the second half Felipe Wajskop França The pace of Europe s economic recovery stabilized in the first half, with a certain amount of moderation in the last three months, partially due to the weakening of exports and, more recently, the slowdown in consumption and the impact of the uncertainties in relation to Greece s future on the confidence of the economic agents. Given that we expect a solution for the Greek impasse in the next few days, albeit a provisional one, the improvement in confidence should favor an economic upturn in Europe in the second semester. The continuity of the ECB s monetary expansion program should also help this process. Finally, prospects of an improvement in the U.S. and Chinese economies in the second half, together with the weaker euro, should benefit European exports. After growing by 0.4% in the previous two quarters, Eurozone GDP should record a 0.3% upturn between April and June. Consumption, favored by the decline in energy prices in the first three months or the year, should exert downward pressure on GDP growth this quarter. In addition, the accommodation of business confidence (although still extremely high) will reduce the pace of investments, another major driver of the European economy in the first quarter. On the other hand, net exports will tend to reverse their negative beginning-of-year impact, thanks to the slight improvement recorded by the United States and the strong depreciation of the euro. Net Exports 1,00 Inventories GFCF Government Consumption GDP 0,48 0,60 0,09 0,15 0,4 0,4 0,12 0,47 0,20 0,09 0,26 0,11-0,16-0,20-0,12 0,04-0,31-0,10-0,24 Quarterly GDP variation contribution of demand components (%) -0,60-0,40-1,00 03/ / / / / / / / / / / / / / / / / / / / /2015 Source: CEIC Global Outlook At their current level, retail sailes through April are pointing to growth of 0.4% in the second quarter, following a 0.7% upturn in the first quarter (0.1% in the three months through April). More importantly, auto sales, which normally anticipate consumption trends, fell by 1.5% in May. The European Commission s consumer confidence index showed a similar tendency: after reaching its highest level since 2007 in March, it recorded two successive declines in April and May, leveling off at a still high level in June. As a result, we expect a certain accommodation in consumption this quarter following average growth of 0.5% in the previous three quarters. 7

8 Confiança do Consumidor , ,3-17,9-9,8-18,7-15,3-7,1-11,6-3,7-8,5-5,6 Consumer confidence index -21, ,4-40 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Source: Bloomberg The PMI indices are also pointing to stabilization of European growth this quarter. In June, the Eurozone s composite PMI reached 54.1 points, slightly above the 54.0 recorded in March, following two successive declines. As a result the average figure climbed from 53.3 to 53.9 points between the first and second quarters, reflecting the performance of both industry (period increase from 51.4 to 52.2 points) and services (increase from 53.5 to 54.1 points). A breakdown of the indicator shows that the upturn has been sustained by prospects of new orders and expectations, suggesting that the uncertainties related to Greece have indeed had a negative impact on confidence. Among the block s various countries, Italy and Spain were chiefly responsible for keeping the indicator high, while Germany exerted downward pressure ,3 58,4 Composite PMI 55 53,7 53,4 52,2 54,0 53,8 54,0 54, ,2 50,4 48,6 51, ,6 46,5 46, Jun-08 Dec-08 36,2 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Source: CEIC Global Outlook On the other hand, net exports should have a less unfavorable effect on economic activity this quarter, after negatively impacting GDP by 0.24 p.p. in the first three months. Between January and March, European shipments grew by 5.0% over the same period last year, while April s figure, the latest available, recorded a year-on-year upturn of 8.1%. The biggest recovery came from shipments to China, with growth moving up from 1.8% to 4.5%. The same tendency was apparent with exports to the U.S., whose growth increased from 19.2% to 22.4%. In addition, given the accrued devaluation of the euro in the second quarter (the nominal effective exchange rate has fallen 1.9% on average between the first and second quarters), it is reasonable to assume that this recovery has continued in the last two months. 8

9 30,0% 20,0% 10,0% 12,6% 9,5% 24,4% 11,6% 8,1% Year-on-year variation in European exports quarterly moving average 0,0% 5,7% 7,6% -1,7% 2,7% -0,8% 2,9% -10,0% -20,0% -22,5% -30,0% Apr-07 Jul-07 Oct-07 Global Outlook Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Oct-09 Jan-10 Apr-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Apr-12 Jul-12 Oct-12 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Oct-14 Jan-15 Apr-15 Source: CEIC Despite the uncertainties surrounding the European scenario this quarter due to the impasse in the negotiations between Greece and its creditors, it seems clear that the economic recovery has continued (albeit at a slower pace). We therefore believe that once the Greek crisis has been resolved, there are sources of consistent growth in the Eurozone, which should fuel the block s expansion in the second half. The expected second-half recovery of the U.S. and Chinese economies and the additional depreciation of the euro (we expect near parity with the dollar by year-end) will favor European exports. In addition, the ECB s monetary stimuli and the gradual improvement in jobs and credit should fuel consumption and investments. Consequently, we expect European GDP to expand by 0.7% in the first half of 2015 and 1.1% in the second, growing by 1.5% in the year as a whole. 9

10 Bradesco Macroeconomic Forecast * 2015* 2016* DOMESTIC ACTIVITY, INFLATION AND INTEREST RATES GDP (%) Agriculture (%) Industry (%) Services (%) Private consumption (%) Government consumption (%) Investment (%) Exports of goods and services (%) Imports of goods and services (%) GDP (R$ billion - current prices) 2,409 2,718 3,107 3,328 3,886 4,374 4,713 5,157 5,521 5,942 6,386 GDP (US$ billion) 1,107 1,395 1,693 1,666 2,208 2,612 2,411 2,390 2,346 2,001 2,091 Population (million) Per Capita GDP (US$ - current prices) 5,865 7,281 8,716 8,469 11,083 13,232 12,105 11,889 11,571 9,788, 10,147 Industrial Production - IBGE (%) Unemployment Rate - IBGE (%) Retail Sales - (%) CPI - IPCA - IBGE (%) CPI - FIPE (%) WPI - IGP-M - FGV (%) Nominal Interest Rates - Selic target (end of period - %) Nominal Interest Rates - Selic target (12-month - %) ,82 10,81 10,81 Real Interest Rates - Selic (12-month - %) ,25 4,54 4,54 EXTERNAL ACCOUNTS AND FX Trade Balance (US$ billion) Exports (US$ billion) Imports (US$ billion) Trade flow (exports + imports) (% of GDP) Deficit of Services and Income (US$ billion) Current Account Deficit (US$ billions) Current Account Deficit (% of GDP) Foreign Direct Investment (US$ billions) FX - end of period (R$ / US$) FX - yearly average (R$ / US$) Nominal FX devaluation (YoY - %) Nominal FX devaluation (average - %) International Reserves (US$ billion) Total Medium and Long term External Debt (US$ billion) FISCAL ACCOUNTS Primary Surplus (R$ billions) Primary Surplus (% of GDP) Public Sector Nominal Balance (% of GDP) Gross Public Debt (domestic and external) (R$ billion) 1,336 1,542 1,740 1,973 2,011 2,243 2,583 2,748 3,252 3,773 4,098 Gross Public Debt (domestic and external) (% of GDP) Global Outlook As of June 26 th (*) Forecast. na = not available. Source: Official figures Production and forecasts(*): BRADESCO 10

11 Team Octavio de Barros - Macroeconomic Research Director Marcelo Cirne de Toledo Global economics: Brazil: Brazilian sectors: Fabiana D Atri / Felipe Wajskop França / Thomas Henrique Schreurs Pires Igor Velecico / Andréa Bastos Damico / Ellen Regina Steter / Myriã Tatiany Neves Bast Regina Helena Couto Silva / Priscila Pacheco Trigo / Leandro de Oliveira Almeida Proprietary survey: Fernando Freitas / Leandro Câmara Negrão / Ana Maria Bonomi Barufi Internships: Ariana Stephanie Zerbinatti / Thomaz Lopes Macetti / Victor Hugo Carvalho Alexandrino da Silva / Davi Sacomani Beganskas / Ives Leonardo Dias Fernandes / Henrique Neves Plens / Mizael Silva Alves Team - BRADESCO does not accept responsibility for any actions/decisions that may be taken based on the information provided in its publications and projections. All the data and opinions contained in these information bulletins is carefully checked and drawn up by fully qualified professionals, but it should not be used, under any hypothesis, as the basis, support, guidance or norm for any document, valuations, judgments or decision taking, whether of a formal or informal nature. Therefore, we emphasize that all the consequences and responsibility for using any data or analysis contained in this publication is assumed exclusively by the user, exempting BRADESCO from all responsibility for any actions resulting from the usage of this material. We all point out that access to this information implies acceptance in full of this term of responsibility and usage. The reproduction of the content in this report (partially or in full) is strictly forbidden except if authorized by BRADESCO or if the sources (the name of the authors, publication and BRADESCO) are strictly mentioned. 11