Strong Labor Markets Bolster Resilience in Brazil and Mexico’s Economies

Brazil and Mexico have stood out among regional peers as their strong economies prove wrong central bankers

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By Maria Eloisa Capurro - Andrew Rosati
September 30, 2023 | 05:34 AM

Bloomberg — Brazil’s and Mexico’s labor markets are extending their hot streaks into the third quarter in an unexpected performance that has underpinned the strength of Latin America’s two largest economies.

Official data released Friday showed Brazil’s jobless rate fell to 7.8% last month while the number of out-of-work people declined to 8.4 million, both figures at the lowest levels since 2015. The numbers come a day after a report showed Mexico’s unemployment sliding under 3% in the same period as job growth is expected to stay strong in coming months.

“These economies are running hot,” said Alberto Ramos, chief economist for Latin America at Goldman Sachs Group. “We’ve seen this from post-pandemic until today.”

Brazil and Mexico have stood out among regional peers as their strong economies prove wrong central bankers as well as analysts who earlier this year forecast sluggish growth and even recessions stemming from aggressive monetary tightening cycles.


While differences in local drivers exist, both countries are benefiting from robust job markets that have supported domestic demand — particularly for services, as consumers’ spending habits seem to have shifted toward activities that were out of reach during Covid-19 lockdowns.

The resurgence of this labor-intensive sector is among the reasons why job markets have been strengthening and creating a virtuous cycle in those economies. Much is still up for debate, however, and economists wonder for how long the trend may continue.

“The labor market has been one of the major surprises we’ve had this year,” said Rafaela Vitoria, chief economist at Inter, a digital financial services company. “It’s only natural that a more dynamic job market translates into higher potential growth.”


Better Employment

Brazilians have been piling back into the workforce after many went to the sidelines during the pandemic. “The labor market is heating up, with better employment numbers and participation rates nearing pre-pandemic levels,” said Leonardo Costa, an economist at asset manager Asa Investments.

Brazil’s labor market resilience since the start of the year has caught the attention of central bankers led by Roberto Campos Neto, who have said that more employment, together with social welfare programs, could be one of the factors behind better-than-expected growth. This week, policymakers boosted their 2023 GDP forecast for the third straight time.

“We’ve seen an increase in disposable income,” central bank Economic Policy Director Diogo Guillen told journalists in Brasilia this week. “We’ve been debating this topic and its impacts on inflation.”

Since 2020, when the coronavirus tore through the country and shuttered businesses, the government has issued cash transfers to low-income and out-of-work Brazilians. President Luiz Inacio Lula da Silva has kept some of the aid flowing as he tries to fight poverty in his third term.

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Bumper crops have also had an outsized role in catapulting growth past forecasts in the resource-rich nation. Income from this year’s so-called super harvest has sparked demand for services like commerce and transportation.

Consumer Confidence

Mexican central bankers have said a firm labor market explains why consumption has beaten estimates and remains at historic highs. In the statement accompanying this week’s policy decision, board members highlighted that employment remains strong.

In their prior rate-setting meeting, a board member said the “strength of consumption and of the labor market do not only show an economy that is resilient, but one that is actually vigorous.”


Latin America’s second-largest economy took off this year as foreign investors plowed capital into Mexico to serve North American markets in a process known as nearshoring. The US economy has so far avoided recession, leading to strong demand for exports like cars, computers and auto parts.

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“The economy is at the highest of its cycle, and the labor market is showing that,” said Marco Oviedo, a Latin American strategist at XP Investimentos.

Services inflation is easing only gradually as people go back to restaurants and spend more traveling. Consumer confidence is at the highest since early 2019 and recreation activities are catching up to their pre-pandemic levels.

Not Broken

Economists doubt labor market gains in Brazil and Mexico will be cut short, even as their key interest rates stand at lofty levels of 12.75% and 11.25%, respectively.


Brazil’s central bank has reiterated plans to relax monetary policy through half-point rate reductions. On the other hand, Mexican policymakers led by Victoria Rodriguez are expected to start cutting only in 2024 as a resilient economy keeps them on watch for inflation.

Elsewhere across the region, Colombia’s services sector is still creating jobs, with higher consumption defying odds of an economic slowdown. Chile’s unemployment rose more than expected in August, but is forecast to fall in coming months.

“We were expecting something would break, but it hasn’t happened,” said Alejandro Cuadrado, global head of foreign exchange at BBVA in New York. “We are seeing this phenomenon even in advanced economies like the US.”


--With assistance from Maya Averbuch and Matthew Bristow.

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