Economic activity and the job market proved to be hotter than expected for 2024. However, warning signs are emerging. Research released in recent days shows that consumers and businesspeople are showing caution due to fear of inflation and high interest rates.
Felipe Vasconcelos, partner at Equus Capital, assesses that the scenario of heated demand in the job market could put even more pressure on inflation, which would justify a restrictive stance by the Central Bank in relation to the basic interest rate (Selic).
Last week, the BC Monetary Policy Committee (Copom) announced a new increase in the Selic rate, by half a percentage point, to 11.25% per year. New increases are on the radar and the interest rate increase cycle may take longer to end if inflation expectations continue to rise.
This week, the midpoint of financial market projections for the IPCA, recorded in the BC’s Focus bulletin, registered the sixth consecutive increase and the third time it has been above the target ceiling, which is 4.5%. Consumer prices increased by 4.76% in the last 12 months to October, according to the IPCA.
“Very negative surprise in October’s IPCA, with inflation above market expectations. Food pressure continues, and the exchange rate effects are beginning to be felt. The inflation scenario within the 4.5% target limit becomes very difficult for 2024, and expectations for 2025 should get worse”, says Ibmec’s national director, Reginaldo Nogueira.
“There will be more pressure on the Central Bank at the last Copom meeting of the year, when an interest rate increase of 0.75 points can no longer be ruled out”, he adds.
Felipe Beraldi, manager of economic indicators and studies at Omie (a developer of business management systems), also points out that, in addition to general pressures, items such as fuel and health plans have increased inflation.
The warming job market and the real increase in the minimum wage represent additional challenges for small businesses, which face increased labor costs.
Unemployment ended September at 6.4%, according to IBGE, the lowest rate since 2013. The number of workers with a formal employment contract was 47.5 million in the month, the highest ever recorded by the General Register of Employed and Unemployed (Caged).
New Selic increases may not be enough to slow down the economy. “There is excess savings in families, and the heated job market and wages, benefiting from the real increase in the minimum wage, should support consumption”, highlight Bradesco economists in a report. However, they note that, historically, interest rates at this level tend to slow economic activity, reducing inflation.
Another factor of attention, although to a lesser extent, are the conflicts in the Middle East. “This geopolitical scenario can affect the entire global production chain, with potential relevant impacts on the world economy”, highlights Daniel Maranhão, CEO of Grant Thornton Brasil.
The political and economic impacts of Republican Donald Trump’s election as president of the United States, the war in Ukraine and China’s attempts to revive the economy are also on the radar.
Consumer confidence and impact on consumption
The Consumer Confidence Index, calculated by the Brazilian Institute of Economics of Fundação Getulio Vargas (FGV Ibre), fell in October, after four consecutive increases. The decline reflects families’ negative perception of finances and particularly affects the consumption of durable goods, pressured by rising interest rates and the economic slowdown.
The National Confederation of Commerce in Goods, Services and Tourism (CNC) recorded, in October, the lowest household consumption intention since March. “Higher-income families are more cautious in relation to credit for durable goods. With the prospect of new increases in the Selic, an even greater retraction in this sector is expected”, comments Felipe Tavares, chief economist at the entity.
Another problem is high default rates. According to Serasa Experian, in August 72.5 million Brazilians had some credit restriction, equivalent to 44.8% of the adult population. Although the number is lower than that of April, it is 1% higher than that recorded in the same month of 2023.
“Without a consistent improvement in consumer income, increases in spending are expected to remain quite modest in the coming months”, observes Luiz Rabi, economist at Serasa Experian.
The confidence of commercial entrepreneurs also fell, according to a study by FGV Ibre. Even with the growth in family income and the booming job market, they maintain forecasts of a smaller expansion in future sales.
The fourth quarter of the year, which is usually driven by events such as Black Friday and Christmas, started off unexpectedly warm, says economist Georgia Veloso, from FGV Ibre.
According to the CNC, business confidence in the sector stagnated in September, interrupting a sequence of five consecutive drops. The assessment is not optimistic: inflationary pressure and rising interest rates limit consumption growth and investment potential. She signals that next year should be very challenging.
The scenario of challenges is confirmed by Claudio Felisoni de Araújo, president of the Brazilian Institute of Retail & Consumer Market (Ibevar) and professor at FIA Business School. He observes instability in the performance of the retail sector. It also points out that it is not yet possible to identify sustainable growth in retail sales, pointing to a scenario of uncertainty in the consumer market.
Industry: be very cautious about the future
Pessimism about the economy is reducing the confidence of industrial entrepreneurs, according to a survey released on Tuesday (12) by the National Confederation of Industry (CNI). “What brought the drop in confidence in November was the assessment of the economy. Both the assessment of current conditions and expectations”, says Marcelo Azevedo, economic analysis manager at the entity.
In civil construction, the situation is a little better, show data from the National Confederation of Industry (CNI) and the Brazilian Chamber of the Construction Industry (CBIC). Despite the optimism, businesspeople express concerns about the high tax burden and the cost of qualified workers, in addition to the scarcity of resources and the increase in input costs, which have put pressure on the sector.
The perception among businesspeople indicates a deterioration in the financial situation of companies throughout the third quarter, marked by an increase in the prices of inputs and raw materials. According to FGV Ibre, these costs grew 5.12% in the 12 months ended in October, compared to 3.37% in the same period of the previous year.
The research was carried out before Caixa Econômica Federal, responsible for 70% of real estate financing in Brazil, adopted services from the Brazilian Savings and Loan System (SBPE). The new guidelines include a reduction in the financing ceiling and limitations on the value of financed properties, changes that directly impact the middle class.
These restrictions reflect the fundraising challenge faced by the bank, which saw a net withdrawal of R$11.2 billion from savings accounts – SBPE’s main source of resources – throughout the year. To compensate for this shortage, Caixa is studying funding alternatives, such as Real Estate Credit Letters (LCIs) and Real Estate Receivables Certificates (CRIs).
Experts warn that these changes could result in an increase in financing costs, making it difficult to own a home and increasing the debate about the interest rates applicable to future real estate financing.
Service sector: an exception to the loss of trust
The exception to this environment of distrust is in services. Activity in the sector shows signs of heating up, driven by growth in employment and income, especially benefiting services aimed at families, as highlighted by Stefano Paccini, economist at FGV.
“After a tepid start to the year, activity in the sector appears to be heating up, with optimistic expectations regarding demand until the end of the year. The macroeconomic scenario, with good employment and income results, favors the sector, which, combined with the gradual improvement in consumer confidence, reflects the good moment in services provided to families”, says the economist.
The sector accumulates growth of 2.3% in 12 months, according to September data.”Brazilian economic activity continues to perform well, supported by a labor market at full employment, growth in the wage bill and a benign credit cycle “, says Igor Cadilhac, economist at PicPay.
