The labor markets in Brazil and Mexico have extended their strong performance into the third quarter, surprising experts and bolstering the strength of the two largest economies in Latin America.
Official data released on Friday showed that Brazil’s unemployment rate fell to 7.8% last month, with the number of unemployed people decreasing to 8.4 million, both at their lowest levels since 2015. This data comes a day after a report indicated that unemployment in Mexico fell below 3% during the same period, while job growth is expected to remain strong in the coming months.
“These economies remain solid,” said Alberto Ramos, Chief Economist for Latin America at Goldman Sachs Group Inc. “We’ve seen it since the pandemic until today.”
Brazil and Mexico have stood out among their regional peers for the strength of their economies, proving central bankers and analysts wrong earlier this year when they predicted slow growth and even recessions due to aggressive monetary tightening cycles.
While there are differences in local drivers, both countries are benefiting from robust labor markets that have supported domestic demand, particularly in the services sector, as consumer spending habits seem to have shifted towards activities that were out of reach during COVID-19 lockdowns.
The resurgence of this labor-intensive sector is one of the reasons why labor markets have been strengthening, creating a virtuous circle in these economies. However, there is still much debate, and economists wonder how long this trend can continue.
“The labor market has been one of the big surprises we’ve had this year,” said Rafaela Vitoria, Chief Economist at Inter, a digital financial services company. “It’s natural that a more dynamic labor market translates into higher potential growth.”
Brazilians have re-entered the workforce after many were sidelined during the pandemic. “The labor market is heating up, with better employment figures and participation rates approaching pre-pandemic levels,” said Leonardo Costa, an economist at asset manager Asa Investments.
Since the beginning of the year, the resilience of the Brazilian labor market has caught the attention of central bankers led by Roberto Campos Neto, who have said that more employment, along with social welfare programs, could be one of the factors behind higher-than-expected growth. This week, authorities revised their GDP forecast for 2023 for the third consecutive time.
Since 2020, when the coronavirus ravaged the country and closed businesses, the government has provided cash transfers to low-income and unemployed Brazilians. President Luiz Inácio Lula da Silva has kept some of the aid flowing while attempting to combat poverty in his third term.
Bountiful harvests have also played a significant role in propelling growth beyond forecasts in the resource-rich nation. The income from this year’s super harvest has boosted demand for services such as trade and transportation.
The Central Bank of Brazil has reiterated its plans to ease monetary policy through half-point rate cuts. On the other hand, Mexican authorities, led by Victoria Rodríguez, are expected to start cutting rates only in 2024, as the resilient economy keeps them watchful of inflation.
In other parts of the region, the Colombian services sector continues to create jobs, while increased consumption defies expectations of an economic slowdown. In Chile, unemployment rose more than expected in August, but it is expected to decline in the coming months.
“We expected something to break, but it hasn’t happened,” said Alejandro Cuadrado, Global Head of FX at BBVA in New York. “We’re seeing this phenomenon even in advanced economies like the US.”