Bank of America Merrill Lynch on Brazil: Detailing the Labor Market Slowdown

Labor markets are finally cooling down in Brazil, despite the better than expected unemployment rate for October released by the IBGE last week. We analyze different aspects of this deceleration, such as disparities among sectors and regions. We also explore the labor markets links with the inflation outlook, especially in the services sector.

Generalized deceleration in labor markets

After creating more than 2 million new jobs in 2010, formal job creation has been decelerating in Brazil since January. The job creation pace has slowed significantly in almost every sector since the beginning of the year, with only sales and services growth remaining above 10%. Conversely, the layoff pace has been relatively stable for most of the categories throughout the year.

The job creation resilience in the sales and services sectors can be explained by the still-strong pace of domestic demand in 2011. As the effects of the recently introduced monetary tightening and sharp deterioration of the global backdrop hit domestic activity, demand faces important headwinds as well. This helps to explain the deterioration in these sectors’ performances, especially since July.

Moreover, job creation in the industrial sector reflects its weak performance so far in the year. The latest industrial production data (for September) showed a 1.6% yoy decline and a 0.8% qoqsa decline in 3Q, the second consecutive contraction. Although the recent depreciation of the BRL may help stimulate the sector until year-end, market participants expect the industry to grow only 1.3% in 2011, according to the Brazilian Central Bank’s latest survey of market expectations.

As a result, net formal job creation is 20% lower than in 2010 year-to-date. All sectors have positive net results so far, but the signs that the labor markets are losing stem are clear, in our view. As we highlighted a few months ago (see Slow deceleration in labor market), labor markets are a lagging indicator of economic activity. So, we expect further slowdown in formal job creation toward year-end, reflecting the ongoing deceleration in economic growth.

Source: GEMs Daily, Emerging Markets, 30 November 2011