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Brazil’s Zero-Deficit Target Unlikely to Survive Slowing Economy

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(Bloomberg) — It’s only a matter of time until President Luiz Inacio Lula da Silva ditches his own government’s zero-deficit fiscal target to keep spending big as Latin American’s largest economy loses steam next year, according to Genial Investimentos.

Assurances by the ruling Workers’ Party that it will respect Finance Minister Fernando Haddad’s strategy to eliminate Brazil’s primary fiscal deficit in 2024 will not hold true as public spending will outpace tax collection, Jose Marcio Camargo, chief economist at Genial, said in an interview in Rio de Janeiro.

“The target will have to change if Haddad is unable to increase tax revenue,” he said. “The question now is when and by how much.”

Camargo, 76, knows the benefits of social spending — he’s one of the designers of Lula’s flagship Bolsa Familia program which provides income transfers and helped lift millions of Brazilians out of poverty two decades ago. But he’s also worried about the impact of excessive government spending on public debt and creditworthiness.

For weeks, investors have been on edge after Lula indicated he’d rather ditch the zero-deficit target, which doesn’t take into account interest payments, than make cuts to investments and programs he considers essential to improve Brazilians’ living standards. While other fiscal rules approved earlier this year ensure public spending won’t get out of control, a strict deficit goal would also limit lawmakers’ ability to pass tax cuts and subsidies.

Haddad has since been trying to salvage the proposal by cajoling Lula’s allies and members of Congress into helping him plug a budgetary gap through tax hikes and other measures to boost revenue. On Thursday, a member of Lula’s cabinet said the 2024 primary budget deficit would indeed be zeroed.

Read more: Lula to Keep Zero-Deficit Goal in Budget Plan, Minister Says

Bracing for the Worst

But the government can still make changes to the proposal. And with Brazil’s public finances already deteriorating, Camargo says investors are bracing for the worst.

In September, Brazil posted a primary budget gap of 18 million reais, the fifth straight month the government ran a deficit. Congress has yet to approve measures that would help generate the 168 billion reais ($34.5 billion) in new revenues that Haddad is seeking to fulfill his budget proposal. Meanwhile, social expenditures like the minimum wage and pensions are set to increase.

“The market is very concerned about how the fiscal issue will evolve,” Camargo said. Without a credible target no one will be able to keep tabs on spending and “we’re going back to a scenario like we had at the beginning of 2023.”

At the start of the year, Brazil’s Congress lifted a constitutional spending limit, allowing billions of dollars to be doled out to aid poor Brazilians. That whipsawed markets.

Spending fears waned with the August passage of the fiscal framework bill, a set of rules proposed by Haddad to shore up public finances. Investors expected the law would mitigate the tail risk that public debt spirals out of control. Currently, the government’s debt-to-gross-domestic-product ratio is running at nearly 75%, according to data compiled by Bloomberg.

Now, with Lula vowing to maintain spending regardless of tax revenues, “You can no longer calculate how debt will evolve against GDP,” Camargo said, adding that the government could adjust the target as soon as March.

On top of a volatile global outlook, marked by high interest rates in the US and a possible slowdown of China’s economy, Camargo says Brazil’s fiscal performance will determine the direction of its assets next year. Markets have rallied recently on Brazil’s central bank cutting rates and on bets that the Federal Reserve will soon follow suit.

For Camargo, the fear of many market participants is that Lula may follow in the footsteps of his hand-picked successor Dilma Rouseff, who doubled down on fiscal stimulus to avoid a recession last decade.

“Will he continue to increase spending, and with it the deficit, to keep the economy from decelerating? That would be disaster.”

Read More: Brazil’s Economy Unexpectedly Shrinks as High Rates Take a Toll

Genial is headquartered in Sao Paulo and offers banking, brokerage and asset management services. It has 170 billion reais in assets under custody, and oversees 45 billion reais under its money management unit, Plural Gestao.

–With assistance from Robert Jameson.

 

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Canada’s unemployment rate holds steady at 6.5% in October, economy adds 15,000 jobs

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OTTAWA – Canada’s unemployment rate held steady at 6.5 per cent last month as hiring remained weak across the economy.

Statistics Canada’s labour force survey on Friday said employment rose by a modest 15,000 jobs in October.

Business, building and support services saw the largest gain in employment.

Meanwhile, finance, insurance, real estate, rental and leasing experienced the largest decline.

Many economists see weakness in the job market continuing in the short term, before the Bank of Canada’s interest rate cuts spark a rebound in economic growth next year.

Despite ongoing softness in the labour market, however, strong wage growth has raged on in Canada. Average hourly wages in October grew 4.9 per cent from a year ago, reaching $35.76.

Friday’s report also shed some light on the financial health of households.

According to the agency, 28.8 per cent of Canadians aged 15 or older were living in a household that had difficulty meeting financial needs – like food and housing – in the previous four weeks.

That was down from 33.1 per cent in October 2023 and 35.5 per cent in October 2022, but still above the 20.4 per cent figure recorded in October 2020.

People living in a rented home were more likely to report difficulty meeting financial needs, with nearly four in 10 reporting that was the case.

That compares with just under a quarter of those living in an owned home by a household member.

Immigrants were also more likely to report facing financial strain last month, with about four out of 10 immigrants who landed in the last year doing so.

That compares with about three in 10 more established immigrants and one in four of people born in Canada.

This report by The Canadian Press was first published Nov. 8, 2024.

The Canadian Press. All rights reserved.

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Health-care spending expected to outpace economy and reach $372 billion in 2024: CIHI

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The Canadian Institute for Health Information says health-care spending in Canada is projected to reach a new high in 2024.

The annual report released Thursday says total health spending is expected to hit $372 billion, or $9,054 per Canadian.

CIHI’s national analysis predicts expenditures will rise by 5.7 per cent in 2024, compared to 4.5 per cent in 2023 and 1.7 per cent in 2022.

This year’s health spending is estimated to represent 12.4 per cent of Canada’s gross domestic product. Excluding two years of the pandemic, it would be the highest ratio in the country’s history.

While it’s not unusual for health expenditures to outpace economic growth, the report says this could be the case for the next several years due to Canada’s growing population and its aging demographic.

Canada’s per capita spending on health care in 2022 was among the highest in the world, but still less than countries such as the United States and Sweden.

The report notes that the Canadian dental and pharmacare plans could push health-care spending even further as more people who previously couldn’t afford these services start using them.

This report by The Canadian Press was first published Nov. 7, 2024.

Canadian Press health coverage receives support through a partnership with the Canadian Medical Association. CP is solely responsible for this content.

The Canadian Press. All rights reserved.

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Trump’s victory sparks concerns over ripple effect on Canadian economy

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As Canadians wake up to news that Donald Trump will return to the White House, the president-elect’s protectionist stance is casting a spotlight on what effect his second term will have on Canada-U.S. economic ties.

Some Canadian business leaders have expressed worry over Trump’s promise to introduce a universal 10 per cent tariff on all American imports.

A Canadian Chamber of Commerce report released last month suggested those tariffs would shrink the Canadian economy, resulting in around $30 billion per year in economic costs.

More than 77 per cent of Canadian exports go to the U.S.

Canada’s manufacturing sector faces the biggest risk should Trump push forward on imposing broad tariffs, said Canadian Manufacturers and Exporters president and CEO Dennis Darby. He said the sector is the “most trade-exposed” within Canada.

“It’s in the U.S.’s best interest, it’s in our best interest, but most importantly for consumers across North America, that we’re able to trade goods, materials, ingredients, as we have under the trade agreements,” Darby said in an interview.

“It’s a more complex or complicated outcome than it would have been with the Democrats, but we’ve had to deal with this before and we’re going to do our best to deal with it again.”

American economists have also warned Trump’s plan could cause inflation and possibly a recession, which could have ripple effects in Canada.

It’s consumers who will ultimately feel the burden of any inflationary effect caused by broad tariffs, said Darby.

“A tariff tends to raise costs, and it ultimately raises prices, so that’s something that we have to be prepared for,” he said.

“It could tilt production mandates. A tariff makes goods more expensive, but on the same token, it also will make inputs for the U.S. more expensive.”

A report last month by TD economist Marc Ercolao said research shows a full-scale implementation of Trump’s tariff plan could lead to a near-five per cent reduction in Canadian export volumes to the U.S. by early-2027, relative to current baseline forecasts.

Retaliation by Canada would also increase costs for domestic producers, and push import volumes lower in the process.

“Slowing import activity mitigates some of the negative net trade impact on total GDP enough to avoid a technical recession, but still produces a period of extended stagnation through 2025 and 2026,” Ercolao said.

Since the Canada-United States-Mexico Agreement came into effect in 2020, trade between Canada and the U.S. has surged by 46 per cent, according to the Toronto Region Board of Trade.

With that deal is up for review in 2026, Canadian Chamber of Commerce president and CEO Candace Laing said the Canadian government “must collaborate effectively with the Trump administration to preserve and strengthen our bilateral economic partnership.”

“With an impressive $3.6 billion in daily trade, Canada and the United States are each other’s closest international partners. The secure and efficient flow of goods and people across our border … remains essential for the economies of both countries,” she said in a statement.

“By resisting tariffs and trade barriers that will only raise prices and hurt consumers in both countries, Canada and the United States can strengthen resilient cross-border supply chains that enhance our shared economic security.”

This report by The Canadian Press was first published Nov. 6, 2024.

The Canadian Press. All rights reserved.

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