Regional Unemployment Update: Growth Trajectories Suggest Uptick In Unemployment

BMI View: A generally weak economic growth outlook will see unemployment rates across most of Latin America's major economies tick up in 2014. That said, demographic factors and the lasting effects of government reform drives to cut back on informalities in the region's labour markets will prevent a rapid spike in unemployment. Moreover, we highlight Mexico and Colombia as two exceptions, with stronger growth rates likely to see labour market conditions tighten from current levels.

We forecast that the average unemployment rate in all of Latin America's largest economies except Mexico and Colombia will rise in 2014, as economic activity moderates or remains relatively weak throughout the region. Slow real GDP growth will unwind some of the labour market gains experienced by Latin American economies over the last several years, when strong economic expansion and reforms to cut back on high levels of informality and reduce underemployment took hold ( see 'Regional Unemployment Update: A Mixed Bag In The Medium Term', May 3).

Through September, unemployment rates in Latin America's seven largest economies are all below average levels seen in the prior five years, illustrating the tighter labour market conditions that have enveloped the region amidst rising investment in commodity exporting industries, such as mining and agriculture, and labour-intensive domestic industries like construction. Moreover, we highlight that a demographic advantage - low levels of growth in the size of regional labour forces - will help insulate several countries from seeing sharp spikes in joblessness. However, employment figures tend to be lagging economic indicators, and we believe that the current low unemployment rates do not fully reflect the weaker trajectory of growth in the region, which will see average jobless rates uptick in the coming years.

Most Regional Unemployment Rates Are Close To Bottoming Out
Latin America - Average Unemployment Rate, % (LHS) & Annual Average Real GDP, % chg (RHS)

BMI View: A generally weak economic growth outlook will see unemployment rates across most of Latin America's major economies tick up in 2014. That said, demographic factors and the lasting effects of government reform drives to cut back on informalities in the region's labour markets will prevent a rapid spike in unemployment. Moreover, we highlight Mexico and Colombia as two exceptions, with stronger growth rates likely to see labour market conditions tighten from current levels.

We forecast that the average unemployment rate in all of Latin America's largest economies except Mexico and Colombia will rise in 2014, as economic activity moderates or remains relatively weak throughout the region. Slow real GDP growth will unwind some of the labour market gains experienced by Latin American economies over the last several years, when strong economic expansion and reforms to cut back on high levels of informality and reduce underemployment took hold ( see 'Regional Unemployment Update: A Mixed Bag In The Medium Term', May 3).

Most Regional Unemployment Rates Are Close To Bottoming Out
Latin America - Average Unemployment Rate, % (LHS) & Annual Average Real GDP, % chg (RHS)

Through September, unemployment rates in Latin America's seven largest economies are all below average levels seen in the prior five years, illustrating the tighter labour market conditions that have enveloped the region amidst rising investment in commodity exporting industries, such as mining and agriculture, and labour-intensive domestic industries like construction. Moreover, we highlight that a demographic advantage - low levels of growth in the size of regional labour forces - will help insulate several countries from seeing sharp spikes in joblessness. However, employment figures tend to be lagging economic indicators, and we believe that the current low unemployment rates do not fully reflect the weaker trajectory of growth in the region, which will see average jobless rates uptick in the coming years.

But Demographics Will Help Prevent A Rapid Spike In Joblessness
Latin America - Total Labour Force, average % chg

Divergence In Labour Market Trajectories For Mexico And Brazil

We maintain our view that Brazil and Mexico's divergent economic fortunes will feed through to differing labour market dynamics, with the former's unemployment rate set to tick up, while the latter's heads south ( see 'Regional Unemployment Update: A Mixed Bag In The Medium Term', May 3). In Brazil, we see economic activity, particularly in the industrial sector, remaining weak in 2014, and we forecast real GDP growth of 2.5% in 2014, from forecasted 2.0% in 2013. Moreover, Brazil is the only major country in Latin America for which we forecast the annual growth rate in its economically active population to be higher in the next five years than in the previous five, a demographic challenge that will see unemployment slightly tick up to 5.2% and 5.5% by the end of 2013 and 2014 respectively, and reach 5.7% by end-2017, from 4.6% in 2012. In contrast, in Mexico we expect labour dynamics to improve over the medium and long term, and forecast unemployment to come in at 4.6% by end-2013 and 4.4% at end-2014. This forecast is based on our view that the country's manufacturing sector is poised to expand rapidly as US economic activity accelerates and rising Chinese wages have made producing goods in Mexico increasingly cost competitive.

Heading In Opposite Directions
Latin America - Unemployment Rate EOP, %

Moderate Uptick In Unemployment In Chile, Peru, And Argentina

In Chile and Peru, where weakening economic activity in China is hitting the two major regional metals exporters' economic through lower metals prices and softened external demand, we maintain our view that unemployment rates will rise from their current low levels. In Peru, the labour market could also be negatively affected by ongoing delays through 2014 in implementing a government stimulus programme directed towards the construction industry ( see 'Robust Infrastructure Project Pipeline But Little Tangible Progress', August 19). That said, despite the mining sector's centrality to driving economic growth in Chile and Peru, we believe that the low level of workers directly concentrated in mining will prevent a drastic spike in unemployment as real GDP growth cools. Indeed, in Chile less than 3.0% of the overall labour force is directly concentrated in mining, and unemployment remained at the historically low level of 5.7% as of September ( see 'Economic Resiliency To Lower Copper Prices', November 7).

Some Resiliency To Rebalancing Forces
Latin America - Unemployment Rate, %

Meanwhile, in Argentina, we also forecast only a moderate spike in unemployment. While structural problems facing the economy - namely, high inflation and external account imbalances - will see real GDP growth remain tepid, we believe that the October 27 midterm election marked an inflection point in the country's political environment ( see 'Midterm Vote Signals Policy Moderation Ahead', October 28). This could see a more moderate policy trajectory going forward, boosting inbound investment, providing support for the labour market.

Reforms And Strong Growth To Lower Unemployment In Colombia

In Colombia, improving economic activity has contributed to strong gains in labour dynamics, particularly in the commerce, restaurant, hotels, and professional services sectors, which combined, account for nearly half of total employment ( see 'Household Deleveraging Approaching An Inflection Point', November 8). As a result, the unemployment rate has declined from a recent peak of 12.0% in 2009 to 9.0% in September - near an all-time low. We forecast unemployment to decline further to 8.3% by end-2014 as economic activity picks up. Furthermore, we forecast that Colombia's labour force will growth by just 1.8% from 2013-2015, down from a 5.6% jump in the labour force from 2010-2012, easing competition for jobs.

Macroeconomic Strength Points To Improved Job Market
Colombia - Average Unemployment Rate, %

Venezuelan Labour Market Will Deteriorate The Most In The Region

We forecast that Venezuela will see the largest jump in its unemployment rate in 2014, reaching 11.5% by end-2014 from a forecasted 9.0% at end-2013. This owes primarily to our view for a deceleration in fixed investment, as government financing begins to dry up due to more moderate oil sector revenue. As such, we believe the construction sector is likely to be hit hard, weighing on employment in 2014. Indeed, while the government's efforts to maintain popular support in the run-up to local and municipal elections on December 8 have seen unemployment remain low by historical standards (7.8% in September), we expect a deterioration in the labour market to occur beginning next year.

BMI Latin America Unemployment Forecasts EOP, %
2013f 2014f 2015f 2016f 2017f
Argentina 7.5 7.8 7.3 7.5 8.0
Brazil 5.2 5.5 5.5 5.6 5.7
Chile 6.4 6.5 6.5 6.3 6.3
Colombia 8.6 8.3 8.3 8.2 8.2
Mexico 4.6 4.4 4.0 4.0 3.9
Peru 6.0 6.3 6.1 6.1 5.9
Venezuela 9.0 11.5 11.0 10.8 10.3
Note: f=BMI forecast; Source: BMI, Respective central banks and statistics agencies

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This article is tagged to:
Sector: Country Risk
Geography: Latin America, Argentina, Brazil, Chile, Colombia, Mexico, Peru, Venezuela
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