Depression Tracker: Unemployment Soars In Latin America's Most Important Economy

If there’s anything Brazil certainly does not need, it’s more bad news. 

The country is, in many ways, a symbol of the great EM unwind catalyzed by falling commodity prices, plunging currencies, reduced demand from China, a looming Fed hike, and, most recently, a yuan devaluation, with the latter being particularly painful for Brazil:

As we’ve documented extensively, the situation is made immeasurably worse by political instability. President Dilma Rousseff is "enjoying" an approval rating of just 8% as the public calls for her impeachment amid allegations of fiscal book cooking and corruption at Petrobras where she was Chairwoman from 2003 until 2010. 

The economic news - which was already bad enough between a harrowing bout of staglflaton and dual deficits on the fiscal and current accounts - just got a lot worse as unemployment spiked to 7.5%, well ahead of consensus and the worst in five years. Here’s FT:

Here's another economic snapshot of Brazil that is probably not going to do much to help lift President Dilma Rousseff's approval ratings.


Unemployment in Latin America's largest economy rose for the seven straight month, hitting 7.5 per cent in July.


That's up from 6.9 per cent in June and much worse than the 7 per cent the market had forecast and the highest since May 2010.


The real fell by as much as 0.8 per cent in early morning trading.


The jump in unemployment - the biggest in five months - is the latest sign of the country's deepening economic malaise.

Rousseff's comments to Handelsblatt that the country will remain mired in recession for another 6-12 months didn't do anything to make the outlook seem any brighter.

Meanwhile, Rousseff scored a victory on Wednesday when the Senate approved a bill to cut payroll tax breaks." That should help "to reduce a gaping fiscal deficit and restore confidence in her government's accounts," Reuters notes, adding that "Rousseff has struggled to pass austerity measures through a rebellious Congress, with the lower house approving bills that raise spending introduced by Speaker Eduardo Cunha, who broke with her coalition and defected to the opposition last month."

But Cunha may not be a stumbling block for too much longer, because as Bloomberg reported early this morning (citing Folha de S. Paulo), Brazil's Attorney-General is set to "charge Cunha for corruption Thursday". The charges, Bloomberg continues, are "part of [the] 'Carwash' investigations into dealings at Petrobras." Here are the implications, courtesy of Bloomberg strategist Davison Santana: 

  • Attorney-General expected to charge Cunha for corruption today; O Globo reports that hard evidence was found with help from Swiss authorities
    • Cunha may be forced to step down from House presidency, depending on strength of evidence; Lawmakers already preparing request for his removal, according to Valor
    • Cunha has been one of the biggest hurdles to President Rousseff’s agenda in Congress; his exit may mean a smoother political environment, as there isn’t likely to be any other strong opposition name to fill his shoes
  • Possibility of better political scenario doesn’t guarantee an easy path for Rousseff, as economic outlook continues to deteriorate; July unemployment rate at 7.5% vs 7% est., 6.9% prior, worst July figure since 2009
  • Senate passed yday a bill that that unwinds payroll tax breaks; text was approved with the changes proposed in the Lower House, which reduces its budget impact but accelerates revenue increase
    • If Senate had decided to amend bill, it would need to return for fresh approval in Lower House, delaying whole process
    • Bill is first of a series of austerity measures; expectation of their approval in Senate led to better performance by BRL last week

Lest we should lose track of why this is important, recall that Brazil is looking to close a yawning budget gap on the way to ameliorating at least one part the following conundrum:

As BofAML put it on Wednesday, "monitoring the upcoming political events amid increasing political and economic uncertainties is important [as] these events [are] possible triggers to improve governability and spur a rebound in confidence, a necessary condition for an inflection in economic growth." They continue: "Even after the government revised the primary fiscal target, risks remain to the 0.15% of GDP print, as some measures waiting to be voted on in Congress could increase public spending if approved."

On that note, here's a look at key upcoming events: 

Of course none of this may end up mattering because as we saw last weekend, Brazilians are in no mood to wait around on a fix from a government they don't trust and whether they realize it or not, China's devaluation means the situation is very likely to deteriorate further, as tipped by Brazil's trade ministry last week. So in the end the most important indicator in determining if and when the country will descend into absolute choas, is this one: