Families have been sustaining activity, but analysts see a risk in depleting financial reserves

08/07/2024

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Bruno Martins — Foto: Leo Pinheiro/Valor

While the strength of Brazilian household consumption in 2024 has surprised even the most optimistic analysts, economists are trying to understand what is driving this phenomenon—whether it is income growth due to a tight labor market or the result of families dipping into their savings. The source of this trend is important because it has implications for future inflation and, consequently, for monetary policy, at a time when the Central Bank sees no room to continue cutting interest rates.

The median expectation of market agents for household consumption growth in 2024 has increased by almost one percentage point since the beginning of the year, to 2.8% in the latest Focus survey by the Central Bank from 1.9% in January. The monetary authority itself now has an estimate higher than this median.

In the second-quarter Inflation Report (IR), released at the end of June, the Central Bank updated its projection for household consumption growth this year to 3.5% from 2.3%, noting that it now expects consumption to rise more than in 2023, when it advanced 3.1%, “despite the slowdown in the expansion of social benefits,” the Central Bank stated in the report.

“Households have high savings rates and financial asset stocks, room for increased spending, and a very heated labor market with rising wages,” said Bruno Martins, an economist at BTG Pactual. “It’s a challenging outlook for the Central Bank,” he added, projecting a 4% increase in household consumption in this year’s GDP.

According to Mr. Martins, BTG’s indicators do not show that families have been depleting their savings this year. “The savings rate indicator continued to rise. It reached the highest level since official records began, excluding the period of fiscal expansion during COVID-19,” he said.

Excluding the pandemic period, which makes evaluation more difficult, Mr. Martins noted that BTG’s household savings rate indicator peaked at 9.4% in 2017 in the four-quarter moving average; in March this year, it hit 9.6%.

“Despite the 1.5% growth in household consumption in the first quarter GDP, the real wage bill and disposable income growth were even higher. I think this growth in household consumption is entirely explained by income growth,” he said.

Fernando Montero, chief economist at Tullet Prebon, said that household consumption rose 4.4% in the first quarter of this year compared to the same period in 2023, surpassing GDP, which grew by 2.46%. As a result, he said, household consumption climbed to 64.9% in 2024 from 63.2% of GDP in the first three months of 2023. During this same period, gross savings in the economy dropped by 1.3 percentage points, to 16.2% in 2024 from 17.5% of GDP in the first quarter of 2023.

Contrary to what might be inferred, Mr. Montero said that families have never consumed so little and/or saved as much of their disposable income as they have at the beginning of this year. In 2024, household consumption as a percentage of Gross Disposable National Income (GDNI), calculated by the Central Bank, in the first quarter was the lowest since official records began, in 2003, Mr. Montero noted. The GDNI includes salaries, social security benefits, social program transfers, and other sources such as rents and financial investments.

In the first quarter of 2024, household consumption represented just over 90% of their gross disposable income, according to Tullet Prebon. In the same period in 2023, this percentage was close to 93%, and in 2022, it was 95%. At the peak of the series, it exceeded 96% in 2008, and at the lowest point until 2024, it was just above 91% in 2009.

“The explanation lies in the record income of families coming from transfers and net public sector spending, which is the real “dissaver” in the system,” wrote Mr. Montero in a report.

Armando Castelar, an associate researcher at the Brazilian Institute of Economics (FGV/IBRE), agrees that the government is a “classic dissaver.” But he also said that the fact that household gross disposable income fell between the first quarter of 2024 and the last quarter of 2023 suggests that the increase in consumption in GDP during this period may have occurred at the expense of a decline in household savings, following an improvement in credit conditions.

Household gross disposable income totaled R$682.1 billion in the quarterly moving average until December 2023, in constant values, adjusted for inflation and seasonally adjusted, Mr. Castelar said. In March this year, this value was R$680.16 billion. “If income does not increase, people can withdraw money from savings or borrow money to continue consuming. Looking at the macro level, it’s the sum of things. The credit helps explain dissaving. Obviously, the flip side is a deterioration in household balance sheets,” said Mr. Castelar.

Mr. Montero noted that household gross income fell by 0.28% in the first quarter of 2024 compared to the fourth quarter of 2023, but after surging by 3.93% at the end of last year, as the payment of court-ordered debts needed to be accounted for by the end of December to avoid contaminating the primary result of 2024.

Mr. Martins, with BTG, noted that another indicator from the bank, which measures the stock of financial assets in household balance sheets, also remains at a high level, which, according to him, “supports the idea that there has been no dissaving, but rather a very strong growth in the wage bill.”

The growth in savings now poses a greater risk for future inflation, Mr. Martins warns. “If, at some point, this savings rate starts to decline, meaning that dissaving does occur, there could be even greater demand pressure, which could affect inflation indicators.”

Mr. Montero, with Tullet Prebon, said he initially thought that household income in the quarter up to May—data yet to be released by the Central Bank—could decline as the government’s early payment of court-ordered debts in February exited the account.

However, strong data from the Brazilian statistics agency IBGE for the labor market and government spending during the period bring doubts to this perspective. The real usual earnings mass in the quarter up to May advanced 9% in the last year, while the federal government’s primary expenditure accumulated a real increase of 13% this year, Mr. Montero said. “These are strong values, based on high levels, adding up to large chunks of GDP and occurring in parallel.”

Yihao Lin, an economist at Genial Investimentos, said stronger household consumption compared with 2024 first-quarter GDP growth and the contraction of the economy’s savings rate compared with the same period in 2023 indicate household dissaving. However, he argued that this was not the main factor for consumption growth. “It’s an additional factor, but we must remember that there were court-ordered debt payments, fiscal policies like the minimum wage increase, and a larger investment budget,” he said.

Although the interest rate outlook is not as favorable as once thought, Mr. Castelar said that the trend is still towards greater credit availability for families, which also tends to support consumption throughout the year. “The whole idea of monetary policy with the high Selic interest rate is to put a brake on this, but the dynamic should still be greatly influenced by consumption,” he said.

Genial’s Mr. Lin said that not all of the strong wage gains and labor market growth translate into activity. “When we look at credit and household debt data, which have improved or at least remained stable, we suspect that part of these gains is being directed towards debt repayment. This combination of a labor market with income gains for families, who in turn are managing to control their debts, is still quite favorable for consumption, even though the interest rate is high,” he added.

*Por Anaïs Fernandes — São Paulo

Source: Valor International

https://valorinternational.globo.com/