Itaú BBA - Economic activity still at slow pace

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Economic activity still at slow pace

February 1, 2019

Recent activity data point to a moderate economic performance in 4Q18.

The Brazilian economy in January 2019

Activity figures continue to show slow growth. The labor market remained weak in December, while confidence indicators lost momentum in January. Inflation remained well-behaved. The government posted a primary deficit of 108 billion reais (1.6% of GDP) in 2018. President Jair Bolsonaro advocated in favor of reforms in his Davos speech. The speakers of the Lower House and the Senate should be elected this evening.

Activity figures continue to show slow growth

Recent activity data point to a moderate economic performance in 4Q18. Real revenues from services were virtually flat in November, extending the weak trend in the indicator for a third consecutive month. Industrial production expanded only 0.2% mom/sa in December, while dropping 3.6% yoy. In our view, recent weakness in industrial production was caused by lagged effects of tightening financial conditions in 3Q18 combined with slowing global growth – particularly in countries that are large buyers of Brazil’s manufactured items. Retail sales provided the only positive surprise. According to census bureau IBGE, both core and broad retail sales advanced significantly (by a seasonally-adjusted 2.9% and 1.5%, respectively) in November, influenced by Black Friday promotions. Out of 10 broad retail segments, the two sharpest increases during the month (“other personal and household items” and “furniture and appliances”) were probably driven by Black Friday sales.

Labor market remained weak in December

In the labor market, there was a net destruction of 334.5 thousand formal jobs in December (Caged). Despite the negative result, it is important to note that the month of December is marked by a pronounced seasonality. Thus, seasonally-adjusted data point to the net creation of 55 thousand jobs, taking the 3-month moving average to 66 thousand jobs, down from 72 thousand in the previous month. In the breakdown by sectors, there were significant advances in services, trade and construction, while manufacturing was flat in the month. The accumulated result in 2018 was the creation of 530 thousand formal jobs, the highest annual pace since 2012. According to the national household survey (PNAD Contínua), the nation-wide unemployment rate stood at 11.6% in December , matching the previous month’s result and topping the median of market expectations and our call (11.4%). Compared to 4Q17, unemployment declined just 0.2 p.p. Using our seasonal adjustment, unemployment climbed 0.23 p.p. to 12.2% in 4Q18. Along with the slide in capacity utilization metrics, the reading suggests that the output gap opened again during the quarter. Weak gains in employment are observed in both the formal and informal labor markets. However, the Ministry of Labor’s CAGED figures suggest improvement in formal employment since early 3Q18. In our view, this improvement will show up soon in PNAD Contínua’s monthly reports.

Confidence among industrial businesses advances in January, but remains at low levels

Confidence indicators published by FGV were ambiguous in December. Industrial confidence finally showed a more significant performance, rising 2.7% during the month, but not enough to recover from the decline prompted by tightening financial conditions in 3Q18. Confidence among retail entrepreneurs decreased somewhat, by 0.2%, influenced particularly by the component related to current conditions, which slipped 2.6% during the month. 

Confidence among construction businesses remained stable, with a small improvement in current conditions offsetting a slide in the expectations component. Confidence among consumers and service businesses stood out positively, going up 3.9% and 3.7%, respectively.

Inflation remained well-behaved

Recent inflation data continue to show signs of a slowdown, reflecting declines in electricity and fuel prices. The IPCA-15 posted a 0.30% variation in January, slightly below our estimate and the median of market expectations (both at 0.35%). Market prices rose 0.51% in January, with the year-over-year rate rising to 3.0% (2.9% in the previous month), while regulated prices fell 0.28%, with the year-over-year rate declining to 6.1% (6.7% in the previous month). The deflation of regulated prices was caused by the reduction in gasoline and electricity prices, which more than offset the increases in health care and urban bus prices. In 2018, the IPCA ended the year with a 3.75% increase, above the 2017 reading (2.95%), but below the target for the year (4.5%). All in all, in the absence of exogenous shocks, inflation will probably remain well-behaved throughout the year, helped by favorable inflationary inertia, inflation expectations anchored to the targets, slack in the economy, and a favorable exchange rate dynamics.

Primary deficit of 108 billion reais (1.6% of GDP) in 2018

On the fiscal side, the consolidated public sector posted a primary deficit of 108 billion reais in 2018 (-1.6% of GDP), beating the annual target of 161 billion reais (-2.4% of GDP) and close to the 2017 result of 111 billion reais (-1.7% of GDP). The central government had a deficit of 120 billion reais (-1.8% of GDP) vs. a target of 159 billion reais (-2.3% of GDP), while regional governments and state-owned companies posted surpluses of 3.5 billion reais and 4.4 billion reais, beating targets that were a surplus of 1.2 billion and a deficit of 3.5 billion reais, respectively. In December, the public sector had a primary deficit of 41.1 billion reais (expected: -37.7 billion), while the central government posted 31.8 billion reais (expected: -31.6 billion). The general government’s gross debt increased to 76.7% of GDP in 2018 from 74.1% in 2017, while the public sector’s net debt rose to 53.8% of GDP from 51.6% in the previous year. The nominal deficit narrowed to 7.1% of GDP from 7.8% in 2017, reflecting lower interest expenses. A favorable fiscal scenario depends strictly on the approval of reforms, such as the pension reform, that signal a gradual return to primary surpluses that are compatible with structural stabilization in public debt.

Jair Bolsonaro advocates in favor of reforms at the Davos meetings

President Jair Bolsonaro spoke during the opening of the main session of the World Economic Forum in Davos, Switzerland. He said the government has credibility to carry out the necessary reforms and reinforced his intention to move on with privatizations, enforce contracts and create a friendlier environment for businesses. Additionally, he remarked that the Brazilian economy is relatively closed to international trade and that changing this is one of his administration’s key commitments. Bolsonaro signaled that he and his economic team will work to place Brazil among the 50 best countries to do business before the end of his term.

Financial assets

In January, the Ibovespa climbed 10.8% in local currency and 17.6% in U.S. dollars. Country risk measured by the CDS fell 41bps and finished the month at 166bps, the lowest since March 2018. The exchange rate appreciated 5.8% to 3.65 reais per dollar by the end of the month.

Upcoming events

The Congressional elections will probably take place this evening. Next week, the Central Bank’s Monetary Policy Committee (Copom) will meet again. The statement and minutes of the meeting (to be released on February 12) will be important to assess the next steps in monetary policy. Furthermore, discussions about the possibility of advancing reforms (such as those involving the pension system, oil-rights transfers, training and technical assistance networks established by the Constitution under the S System) and the first measures by the new administration (such as simplifying bureaucracy and opening the country to international trade) will be closely watched.

Internationally, all eyes are still on trade negotiations between the U.S. and China.



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