Consequences of Economic Activity on Monetary Policy

BRAZIL ECONOMICS - Report 18 Mar 2024 by Alexandre Schwartsman, Cristina Pinotti, Paula Magalhães and Diego Brandao

This week, the COPOM is expected to reduce the SELIC rate by a further 50 basis points to 10.75% and maintain the forward guidance for further cuts of the same size. In 2023, service prices were marked by disinflation, but there are risks to the continuity of this process due to the ongoing strong activity. The data for January show that household income continues to be robust, thanks to the tight labor market and the increase of the minimum monthly wage in real terms. The activities in the commerce and service sectors have been a positive surprise, also influenced by the payment of judicial credit warrants (precatórios) by the federal government. While economic growth of 2.9% in 2023 was particularly driven by the outstanding performance of agriculture, this year expansion should be near 2%, led mostly by aggregate demand. Inflation of the prices of items more strongly correlated with the economic cycle continues to be high, and economic activity can fan this effect, jeopardizing achievement of the inflation target over the relevant horizon.

ROBUST ECONOMIC ACTIVITY - Although activity lost steam in the second half of 2023, when GDP remained constant and non-agricultural output grew at a slower pace than in the first six months, the data for the start of this year point to recovery.

According to the PNAD, the occupied population again reached 100 million in January, with an increase of 364 thousand workers (285 thousand in December). Despite this recovery in December, in the last quarter of 2023 the number declined. The unemployment rate (Graph 1) fell again in January, from 7.8% to 7.7%, despite the increase of 0.1 p.p. in the participation rate. Even when considering a constant participation rate at the historic average before the pandemic, the unemployment would have fallen (9.3%). Moreover, real income rose for the eighth straight month (0.5%), reaching an annual variation of 3.8%, boosted by the real increase of the minimum wage of 2.4%. Average labor income now stands 6% above the level of January last year. As we alerted in our penultimate Weekly Report (“GDP in 2023 and what can be expected in 2024”), wages have been rising faster than worker productivity.

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