Bad moon rising

BRAZIL ECONOMICS - Report 16 Dec 2024 by Alexandre Schwartsman, Cristina Pinotti and Diego Brandao

Our fears, expressed in the September Quarterly Outlook, regarding the overheating of the economy, have materialized.

Today, there are more signs that the economy is operating above its potential—a phenomenon acknowledged by the Central Bank itself. It revised its estimates of the output gap from "close to zero" to "positive," and more recently to "more positive", as indicated in the latest Copom minutes.

The labor market continues to reach new lows in unemployment rates, even given some recovery in labor force participation, which remains below pre-pandemic levels. In line with this, nominal wages have been rising faster than productivity, leading to an increase in Unit Labor Costs.

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