The inflation surge is expected to virtually annul the government’s attempt to offer support to household income and, consequently, to consumer spending, with fiscal stimulus measures such as the release of money from the Workers’ Severance Fund (FGTS) from this month on, a study by Santander shows.
Economists Gabriel Couto and Ítalo Franca estimate that withdrawals – up to R$1,000 per worker, which add up to R$25 billion to R$30 billion – will add 0.6 percentage point this year to the country’s extended real total wage bill – which includes wages, social security benefits and federal transfers. Even so, the growth projection for total wage bill has practically not changed between the October report and the one to be published Wednesday by the bank: it has gone to 3.2% from 3.3%, after plummeting 8% in 2021.
This occurs because the increase in the inflation projection to 7.9% from 6% annulled the expected growth with the withdrawals, according to Messrs. Souto and Franca. The higher inflation, they explain, reduces the real growth of the average income. At the same time that the employed population grows, the real income from work reached all-time lows, eroded by the persistent inflationary shock, they point out, in addition to lower entry-level wages for those returning to the labor market, Mr. Couto points out.
“We’ve had considerable inflationary surprises in the last few months and this directly impacts real income. The big point we can take from this update is that, even with the release of funds from the FGTS that we now include, the worsening of the inflationary picture has eroded this income,” the economist said.
Although fiscal stimuli play an important role, they say, the impact of inflation on the economy’s total income is greater. For example: the projected growth of 3.2% for the expanded wage bill this year contemplates fiscal stimuli, withdrawals from the FGTS and the IPCA (Brazil’s official inflation index) at 7.9%. In this case, the real gain in average income is 0.4%. “It’s already quite modest, especially when we look at what happened to the average income last year, when it dropped more than 4%,” Mr. Couto recalls.
If only the inflation forecast goes to 9%, the real average income would fall, reducing the growth of the expanded total wage bill to 2.5%. If the IPCA is maintained at 7.9%, but the scenario no longer contemplates withdrawals from the FGTS, there would also be a drop in the advance of the extended wage bill, but the loss would be a little smaller, to a growth of 2.8%.
The growth of the expanded total wage bill this year comes from the recovery of the labor market, the expansion of cash transfers programs Bolsa Família/Auxílio Brasil (to R$89 billion from R$35 billion) and the adjustment of social-security benefits for inflation, points out the report.
Mr. Franca stressed the mismatched effect of higher inflation on the extended total wage bill. “It ends up decreasing the value for the year. The higher [the price index] is, the more you deflate by a higher number, the more it erodes this income that is already given – the minimum wage and the benefit amounts are fixed. It ends up leading to a higher correction value for the minimum wage next year, but this increase will only be observed if inflation meets the target. We ended up losing a little of the gain [in the extended salary mass] this year because we are revising inflation upwards.”
In relation to 2023 and 2024, Santander’s estimates for the growth of the wage bill are lower, with increases of 1% and 1.8%, respectively, considering the inflation measured by the IPCA at 4% next year and 3% in 2023.
In Santander’s high inflation scenario (5% in 2023 and 4% in 2024), the extended total real wage bill would fall 1% next year and grow only 0.4% in 2024.
If Santander’s baseline scenario predictions materialize, the real total wage bill will reach 2019 levels only in 2024. “As the people who are entering the labor market take a while to recover the pre-pandemic wage levels and inflation continues at slightly more uncomfortable levels, we imagine that this recovery in average income will be a little slower, even though we have already recovered the pre-pandemic occupation levels,” Mr. Couto said.
According to economists, the projections for total income are consistent with the outlook for an economic activity in which household consumption advances 0.8% in 2022, remains stable in 2023 and grows 1.5% in 2024.
Santander estimates that the long-term elasticity between the real total wage bill and household consumption is close to 1.05 – that is, each 1% increase in the total wage bill raises consumption by 1.05%. During the pandemic, economists note, this elasticity even jumped to 1.5, which probably helped activity recover in 2021. For the coming periods, however, it is expected to return to levels closer to their pre-pandemic values (around 1), they say.
“Vaccination was crucial in recovering domestic activity and increasing social mobility; now, we believe the focus will be on inflation convergence,” the report points out.
Source: Valor International