Brazil Economic Weekly

Transcription

1 Macroeconomic Research Department Macroeconomic Research Department Brazil Economic Weekly July 14 th primary balance: revenues and expenses outlook Myriã Tatiany Neves Bast We re still only halfway through 2017, but as the Federal Budget goes up for a vote, the focus has started to shift towards the 2018 primary balance. The Budget Guidelines Bill (LDO, in the Portuguese acronym) approved by Congress past week set the target for next year s primary balance at a deficit of BRL 129 billion, considering the central government only. However, when we take into account the market forecasts for GDP and inflation, additional budget cuts and/or tax hikes may be needed. Since the spending cap was adopted, monitoring revenues has become a key element to determine whether the government will be able to reach its primary balance target. Therefore, it is important to note that, in order to reach its deficit target of BRL 129 billion, the government expects GDP to grow 2.5% and annual inflation to come in at 4.5%. However, consensus estimates from the Focus survey have GDP growing at 2.0%, and consumer inflation (IPCA) at 4.2%. If the historical relationship between revenue and GDP growth holds true, and based on the market consensus for GDP, the target would need to be adjusted by BRL 13.1 billion. As inflation expectations drop, revenue collection also tends to be lower. Incorporating these new forecasts, the primary deficit would move from BRL 129 billion to BRL billion. Without considering any new government measures, our simulations suggest a similar result. This year, in order to reach its primary deficit target of BRL 139 billion, the government cut approximately BRL 40 billion from its budget. Finding an additional BRL billion in cuts sounds believable, although certainly challenging. Even though the 2018 outlook for the economy and for public finances remains a challenging one, given the needs to make additional cuts to meet the deficit target, there are still some measures and instruments that the government can resort to, as the recent public debate has demonstrated. BRAZIL ECONOMIC WEEKLY Wage growth in the United States to be slower than in previous cycles Estevão Augusto Oller Scripilliti There is a growing debate on the wage dynamics in the United States in the current phase of the economic cycle that contemplates the following characteristics of the labor market: low unemployment rate; a declining share of part-time jobs for economic reasons; the average unemployment rate is decreasing, while the laid-off workforce is being replaced at a faster rate; higher turnover in certain sectors and a growing number of unfilled vacancies. All of these elements suggest a latent wage pressure in the economy, which has yet to be confirmed: wages have been growing at a more moderate pace than predicted by most analysts. The U.S. economy continues to grow steadily and consistently, with a clear momentum towards low unemployment. However, the specific characteristics of the economy and the jobs market in the current moment indicate that wages will grow less and at a slower pace than suggested by previous economic cycles. This trend should be reflected in forecast models over time, and analysts are likely to adjust their forecasts for wage growth, inflation and pace of monetary tightening. We have already seen some of the adjustments in practice, with the frustration over price behavior in 2017, and with the market and the Fed revising their interest rate forecasts over time. A closer and more careful look at the various job market strata increases our confidence that it will be a while before we see wage pressures reach levels that would worry the Fed. 1

2 2018 primary balance: revenues and expenses outlook Myriã Tatiany Neves Bast We re still only halfway through 2017, but as the Federal Budget goes up for a vote, the focus has started to shift towards the 2018 primary balance. The Budget Guidelines Bill (LDO, in the Portuguese acronym) approved by Congress past week set the target for next year s primary balance at a deficit of BRL 129 billion, considering the central government only 1. However, when we take into account the market forecasts for GDP and inflation, additional budget cuts and/or tax hikes may be needed. According to the bill, the government s target is to deliver a primary deficit of BRL 129 billion in For that to take place, expenditures will need to stay within the spending cap i.e., they cannot exceed BRL trillion for the year 2. According to the latest bi-monthly report on revenues and expenditures, the government plans to stay below the cap in As such, it will be able to increase spending by as much as BRL 80 billion in While that may be a significant increase, it is important to remember that much of that amount will be consumed with the growth in mandatory spending. Just for reference, the government expects a BRL 52 billion increase in social security spending in Considering the characteristics of these expenditures, next year s increase is expected to be closer to BRL 60 billion. In any case, the government will stay under the cap, since expenditure-side adjustments that have already been made will continue to occur in Since the spending cap was adopted, monitoring revenues has become a key element of forecasts to determine whether the government will be able to reach its primary balance target. Therefore, it is important to note that, in order to reach its deficit target of BRL 129 billion, the government expects GDP to grow 2.5% and annual inflation to come in at 4.5%. However, consensus estimates from the Focus survey have GDP growing at 2.0%, and consumer inflation (IPCA) at 4.2% 3. If the historical relationship between revenue and GDP growth holds true, and based on the market consensus for GDP, the target would need to be adjusted by BRL 13.1 billion. As inflation expectations drop, revenue collection also tends to be lower. Incorporating these new forecasts, the primary deficit would move from BRL 129 billion to BRL billion. Without considering any new government measures, our simulations suggest a similar result. However, there are some uncertainties concerning the elasticity of revenues to GDP growth once the economy emerges out of the crisis. Elasticity was high in the years prior to the recession, due to factors such as the integration of new workers to the formal labor market. Therefore, we find it appropriate to simulate scenarios considering how different rates of GDP growth can lead to different primary deficit scenarios. We also estimated revenues and the primary deficit if elasticity differs from its historic levels (20% less or 20% greater). One of the reasons we could see higher elasticity levels in 2018 would be if companies fail to pay some of their taxes due to the recession, which could be offset with the recovery of economic activity. Domestic Outlook GDP >> 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% Primary Primary Primary Note: Primary 1: with revenue/gdp elasticity at historical levels Primary 2: with revenue/gdp elasticity 20% below historical levels Primary 3: with revenue/gdp elasticity 20% above historical levels Source: 2018 LDO, bimonthly revenue and expenditures report, Bradesco 1 For the consolidated government, including state governments, the deficit target is BRL 131 billion. 2 Considering the spending cap for 2016, adjusted by the year-to-date inflation rate as of June 2017 (3%). 3 As per Focus Report of July 10, Table 1 Estimated primary deficit for different GDP scenarios, considering the budget spending cap for changes to GDP only (BRL billions) 2

3 Table 2 Estimated primary deficit for different GDP scenarios, considering the budget spending cap with Consumer Inflation (IPCA) at 4.2% in 2018 (BRL billions) GDP >> 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% Primary Primary Primary Note: Primary 1: with revenue/gdp elasticity at historical levels Primary 2: with revenue/gdp elasticity 20% below historical levels Primary 3: with revenue/gdp elasticity 20% above historical levels Source: 2018 LDO, bimonthly revenue and expenditures report, Bradesco Table 1 shows that, for GDP growth ranging from %, the primary deficit ranges between BRL billion. In this case, without considering the effects of inflation on revenue. In table 2, we estimated annual consumer inflation (IPCA) at 4.2%, as expected by the market, and replicated the same exercise. This is a simplified forecast, since consumer inflation could turn out to be lower if GDP only grows 0.5%, for example. However, just to get an idea of the impact, considering growth in the same % range, deficit would vary from BRL billion. Based on these exercises, we can estimate the additional effort needed to reach the BRL 129 billion deficit target. GDP >> 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% Cuts Cuts Cuts Note: Primary 1: with revenue/gdp elasticity at historical levels Primary 2: with revenue/gdp elasticity 20% below historical levels Primary 3: with revenue/gdp elasticity 20% above historical levels Table 3 Estimated additional cuts for different GDP scenarios, considering the budget spending cap for changes to GDP only (BRL billions) Source: 2018 LDO, bimonthly revenue and expenditures report, Bradesco Table 4 Estimated additional cuts for different GDP scenarios, considering the budget spending cap with Consumer Inflation (IPCA) at 4.2% in 2018 GDP >> 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% Cuts Cuts Cuts Note: Primary 1: with revenue/gdp elasticity at historical levels Primary 2: with revenue/gdp elasticity 20% below historical levels Primary 3: with revenue/gdp elasticity 20% above historical levels Source: 2018 LDO, bimonthly revenue and expenditures report, Bradesco Domestic Outlook According to the market forecast, with GDP growth at 2.0% and inflation at 4.2%, the government would need to cut an additional BRL 15 billion in order to meet its target. Given the current scenario, in which revenues are less responsive to GDP growth, these cuts could add up to as much as BRL 27 billion. This year, in order to reach its primary deficit target of BRL 139 billion, the government cut approximately BRL 40 billion from its budget. Finding an additional BRL billion in cuts sounds believable, although certainly challenging. Therefore, the market has started to consider different alternatives. On the one hand, some have raised the possibility of cutting a supplementary benefit that is available for low-income individuals (abono salarial), which would save the government approximately BRL 18 billion practically allowing it to reach its target, according to market forecasts. Ending the benefit would require getting a bill approved in Congress, but considering the delicate nature of this issue, the government may look elsewhere to make its cuts. Significant expenditures cuts have already been made, increasing the likelihood that the government will look for new sources of revenue. Some of the alternatives discussed so far include: raising a few specific taxes, such as the Tax on 3

4 Manufactured Products (IPI), the Social Integration Program/Social Security Financing Contribution (Pis/ Cofins) for gasoline and other fuels, as well as the Contribution for Intervention in the Economic Domain (CIDE). Raising the CIDE tax, for instance, would raise revenues by approximately BRL 3.5 billion/year. On the other hand, raising the IPI would have a smaller impact: adding 2 p.p. to the average rate would generate up to BRL 1 billion in revenues. Other options for increasing revenues include privatization and concessions, including those which the government may negotiate after In short, even though the 2018 outlook for the economy and for public finances remains a challenging one, given the needs to make additional cuts to meet the deficit target, there are still some measures and instruments that the government can resort to, as the recent public debate has demonstrated. Domestic Outlook 4

5 Wage growth in the United States to be slower than in previous cycles Estevão Augusto Oller Scripilliti There is a growing debate on the wage dynamics in the United States in the current phase of the economic cycle that contemplates the following characteristics of the labor market: low unemployment rate; a declining share of part-time jobs for economic reasons; the average unemployment rate is decreasing, while the laid-off workforce is being replaced at a faster rate; higher turnover in certain sectors and a growing number of unfilled vacancies. All of these elements suggest a latent wage pressure in the economy, which has yet to be confirmed: wages have been growing at a more moderate pace than predicted by most analysts. A few different explanations for the current dynamics may be taken into consideration: i) inflation expectations (and prices in general) have been so well-anchored that wages have been kept low; ii) after the financial crisis of 2008, labor productivity is low, which does not favor more robust wage increases; iii) recent advances in robotization create a greater potential for workforce replacement than in the past, keeping wage pressures low despite the low unemployment rates; iv) there is a shift underway in the job composition of the U.S. economy, towards lowerwage industries (services in general), which has been keeping average wage growth down. Therefore, our analysis must look at specific wage levels in order to reach a better understanding of the recent wage dynamics in the U.S. economy, based on the controls and calculations made by the Atlanta Fed with data from the Bureau of Labor Statistics (BLS). If we look at the wages of the employees who stayed at their jobs, and of those who have changed jobs in less than 12 months, we find that wages have been increasing steadily since 2014 (chart 1). 7,0 6,0 6,4 6,5 Workers who stayed in the same job Workers who changed jobs Chart 1 12-month change in wages 5,0 4,0 4,2 4,5 4,0 4,6 4,8 3,8 3,8 4,4 3,9 3,0 2,0 2,9 3,3 2,9 2,7 3,0 1,0 1,1 1,3 1,6 0,0 Apr-97 Oct-97 Apr-98 Oct-98 Apr-99 Oct-99 Apr-00 Oct-00 Apr-01 Oct-01 Apr-02 Oct-02 Apr-03 Oct-03 Apr-04 Oct-04 Apr-05 Oct-05 Apr-06 Oct-06 Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Source: Federal Reserve Atlanta, Bradesco Global Outlook While the wages of workers who have changed jobs was up 3.9% in the last 12 months, the wages of employees who stayed on the same job grew 3.0% over the same period. It should be noted that the current rate of wage growth (3.0% for employees who did not change positions) is still lower than in the last high-inflation periods in the United States (4.5% in 1998 and 3.8% in 2007). Here, we see a first element that confirms the theory that the general anchoring of inflation expectations can lead to a lower price and wage perception, even if unemployment and idleness rates remain the same. Another statistic that supports the theory of wages being anchored at lower levels since the financial crisis of 2008 is the percentage of jobs with zero 5

6 wage growth. As shown in chart 2, this number was at approximately 11% in 1998/2000, and was also close to that level at the end of the economic growth cycle, in 2006/2007. The current percentage of jobs with zero wage growth is far from this level, at approximately 14.5%, down from 17.0% when the impact of the financial crisis on the job market was at its peak (2010). This greater percentage of jobs without wage growth might be due to a more widespread perception of permanently low inflation. Thus, the closer inflation expectations are to zero, the greater the chances of zero nominal wage growth. 19,0 17,0 16,2 17,2 16,1 Chart 2 Percentage of jobs with zero wage growth (%) 15,0 14,0 15,0 14,4 13,0 11,6 11,5 13,0 11,0 11,0 10,1 9,0 May-97 Jan-98 Sep-98 May-99 Jan-00 Sep-00 May-01 Jan-02 Sep-02 May-03 Jan-04 Sep-04 May-05 Jan-06 Sep-06 May-07 Jan-08 Sep-08 May-09 Jan-10 Sep-10 May-11 Jan-12 Sep-12 May-13 Jan-14 Sep-14 May-15 Jan-16 Sep-16 May-17 Source: Federal Reserve Atlanta, Bradesco Another labor market segmentation that suggests significant differences in comparison with previous periods of widespread pressures on the job market is the wage gains for workers aged between 25 and 54 years, compared to workers aged 55 or older. Generally speaking, workers in the first group are in a more dynamic stage of their careers and earn higher wages, while the second group is usually in a more advanced career stage, with more moderate wage increases. Chart 3 shows a comparison between these groups. Theory suggests that, when the economy is on an upward trend, wage pressures tend to become more widespread, with smaller differences among different worker categories. The theory is confirmed by the ratio of wage increases between both groups, which shows that wages for individuals age 55 years or older grow more in line with workers aged during economic upturn periods (1999 and 2007), and tend to be less aligned during economic downturn periods (2003, 2010/2011). In fact, when the economy was on an upswing, this ratio was as high as 80%; however, this ratio is currently below 60%, and seems far from a more widespread pattern of wage growth. 90% 70% 64,4% 58,8% 76,0% 84,2% 78,4% 64,1% 81,6% 58,3% 62,2% 56,8% Chart 3 Ratio of wage increases for workers ages vs. workers age 55 or older 50% 30% 34,6% Global Outlook 10% nov/97 mai/98 nov/98 mai/99 nov/99 mai/00 nov/00 mai/01 nov/01 mai/02 nov/02 mai/03 nov/03 Finally, two other elements reinforce the idea that the current wage dynamics is still far from more widespread wage pressures that could bring mai/04 nov/04 mai/05 nov/05 mai/06 nov/06 mai/07 nov/07 mai/08 nov/08 mai/09 nov/09 mai/10 nov/10 mai/11 nov/11 16,7% mai/12 nov/12 mai/13 nov/13 mai/14 nov/14 mai/15 nov/15 mai/16 nov/16 mai/17 Source: Federal Reserve Atlanta, Bradesco worries of a fast increase in inflation the short term: i) regional dispersion in wages remains high; ii) the greatest variations in wages compared to their 6

7 historic averages are in the industries with the lower wages. As far as the regional dispersion, chart 4 shows that, in the late-1990s cycle, the ratio between the standard deviation and the average wage increases for the country s various regions (a measure of dispersion among different regions) hovered around 5%. This same measure has fluctuated for something around 10% in the expansion cycle of the real estate market, between 2005 and 2007, and is now above 15%. That provides some evidence for the hypothesis that wage growth is still not widespread at the current stage of the U.S. economic cycle. 30,0% 25,0% 20,0% 15,0% 11,6% 11,9% 16,3% 26,8% 14,9% 21,7% 22,3% 18,4% 15,6% Chart 4 Wage dispersion between different U.S. regions (standard deviation/ mean wage variation) 10,0% 8,1% 9,5% 9,5% 5,0% 0,0% 2,5% Jan-98 Sep-98 May-99 Jan-00 Sep-00 May-01 Jan-02 Sep-02 May-03 Jan-04 Sep-04 May-05 Jan-06 Sep-06 May-07 Jan-08 Sep-08 May-09 Jan-10 Sep-10 May-11 Jan-12 Sep-12 May-13 Jan-14 Sep-14 May-15 Jan-16 Sep-16 May-17 Source: Federal Reserve Atlanta, Bradesco On its own, regional dispersion cannot be seen as proof of the absence of aggregate wage pressure in the country, but it is one more piece of evidence that can be taken into consideration. When we combine this regional information with the analysis of wages in each industry, we reinforce the argument for the absence of more widespread wage pressures at this moment. Looking at wage increases across different industries, Chart 5 shows that there is a negative relationship between the industries with the highest wage gains and the lowest position of the industry s current wage variation in its own historical distribution of wage variations. In other words, industries where wages are currently growing the most are seeing increases well below their historic patterns, while industries with the lowest increases are near the top of their wage increases. This phenomenon reflects the increased weight of lower-wage industries (education, health, leisure, hotels and general services) in the U.S. economy, with a relative wage increases in these lower-paying industries, to the detriment of higherwage industries (financial, public sector). Wage growth (12-month change) 4,3 4,1 3,9 3,7 3,5 3,3 3,1 2,9 Chart 5 Wage growth in industry Vs. historical distribution of current wage increases Global Outlook 2,7 2,5 0,2 0,25 0,3 0,35 0,4 0,45 0,5 0,55 0,6 0,65 0,7 Current increases in industry s historical distribution (from 0 to 1) There is no single metric that shows us the clear direction and pace of wage variation in the U.S. We believe that a certain level of discomfort Source: Federal Reserve Atlanta, Bradesco regarding this issue is warranted, given the low unemployment rates, the signs provided by some industries that are struggling to fill vacancies, and 7

8 how quickly recently laid-off workers are re-hired. However, several elements indicate that we are still far from the conditions under which labor market pressures are more widespread, such as: lower wage growth for employees who stay at their jobs when compared to previous high-inflation periods, higher number of jobs with zero wage growth, still considerable difference between the wages of employees in the age range when compared to those 55 and older, great wage growth dispersion among different regions across the country, and finally, greater wage dynamism in lower-wage industries, to the detriment of higher-wage industries, which produces a negative composition effect for average wages. The U.S. economy continues to grow steadily and consistently, with a clear momentum towards low unemployment. However, the specific characteristics of the economy and the jobs market in the current moment indicate that wages will grow less and at a slower pace than suggested by previous economic cycles. This trend should be reflected in forecast models over time, and analysts are likely to adjust their forecasts for wage growth, inflation and pace of monetary tightening. We have already seen some of the adjustments in practice, with the frustration over price behavior in 2017, and with the market and the Fed revising their interest rate forecasts over time. A closer and more careful look at the various job market strata increases our confidence that it will be a while before we see wage pressures reach levels that would worry the Fed. Global Outlook 8

9 Bradesco Macroeconomic Forecast Bradesco Macroeconomic Forescast * 2017* 2018* 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) 3,109 3,333 3,885 4,373 4,805 5,316 5,779 5,999 6,266 6,552 7,032 GDP (US$ billion) 1,695 1,668 2,207 2,611 2,459 2,463 2,455 1,800 1,795 2,046 2,161 Population (million) Per Capita GDP (US$ - current prices) 8,716 8,469 11,083 13,229 12,345 12,254 12,109 8,808 8,713 9,855 10,33 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 - %) Real Interest Rates - Selic (12-month - %) 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) 1,740 1,973 2,011 2,242 2,579 2,740 3,252 3,926 4,354 4,980 5,751 Gross Public Debt (domestic and external) (% of GDP) As of July 14 th (*) Forecast. na = not available. Source: Official figures Production and forecasts(*): BRADESCO 9

10 Team Fernando Honorato Barbosa Economists: Internships: Ana Maria Bonomi Barufi / Andréa Bastos Damico / Constantin Jancso / Daniela Cunha de Lima / Ellen Regina Steter / Estevão Augusto Oller Scripilliti / Fabiana D Atri / Igor Velecico / Leandro Câmara Negrão / Marcio Aldred Gregory / Myriã Tatiany Neves Bast / Priscila Pacheco Trigo / Regina Helena Couto Silva / Thomas Henrique Schreurs Pires Alexandre Stiubiener Himmestein/ Christian Frederico M. Moraes / Felipe Alves Fêo Emery de Carvalho / Felipe Yamamoto Ricardo da Silva / Gabriela Soares de Faria / Mariana Silva de Freitas / Rafael Martins Murrer 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. 10