Can the expansion of consumption guarantee 3% GDP growth?
The growth of household consumption, spurred by monetary policy, has been the driving force behind the recovery. However, the previous quarter witnessed a substantial deceleration, and if one takes real retail sales as a bellwether of consumption (which, as reiterated in recent reports, is an excellent one), the indications are not favorable for recovery.
If one looks at the real interest rates (which remain low), real labor income (which continues to grow) and new lending (also rising, albeit fitfully), the conclusion is the opposite. In this report, we show robust empirical evidence that this deceleration is due to an important change in the degree of formalization in the labor market, where the improvement will be slow, limiting growth of consumption.
Logic dictates that the propensity to consume of a formal employee, who has more job security and access to credit, should be higher, ceteris paribus, than that of an informal worker. When introducing the degree of formalization in the model to explain real retail sales, not only is the adjustment to the data better than in the previous model (without this variable), it produces out-of-sample projections that do not incur errors in the recent period, during which the employed population has indeed grown, but mainly through higher employment in the informal market, reducing the degree of formalization.
A vicious circle is operating. Without an exogenous force (fiscal policy, or a rise of investments and/or exports), the recovery of growth depends on elevation of household consumption, which in turn requires an increase not only of real income, but also a higher degree of formalization. But to hire more workers with formal contracts, companies have to be certain of stronger demand, which comes from expansion of consumption.
The unavoidable conclusion is that the recovery dynamic portends slow GDP growth, which will probably fall short of our previous projection of 3% in 2018.
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