Itaú BBA - Brazil’s GDP proxy consolidates weak activity in December

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Brazil’s GDP proxy consolidates weak activity in December

February 18, 2019

Relative to the same month in 2017, the index rose 0.2%

Talk of the Day


According to the central bank, December’s GDP proxy, IBC-BR, increased 0.2% mom/sa, above our call and the median of market expectations (-0.1% and 0.0%, respectively). Relative to the same month in 2017, the index rose 0.2% (our call: -0.4%; market’s: 0.0%). On a quarterly basis, the index increased 0.2%. The series was revised downwards since January/2017.

The 4Q18 result was marked by weakness in the industrial sector, which retreated 1.3% in 4Q18 (according to census bureau IBGE’s PIM-PF), while broad retail sales and real revenues from services both increased 0.3% (according to IBGE’s PMC and PMS, respectively). Fragility in industrial activity partly reflects domestic factors (such as the lagged effects of tighter financial conditions) as well as loss of economic momentum in Brazil’s key trading.

Macro Vision: The rise in underlying service inflation in recent months has been notable, especially in a scenario of high spare capacity in the Brazilian economy and with broader inflation indexes contained. In our view, this recent increase is just data noise and not a sign that service inflation will likely continue to accelerate. The still-weak labor market will probably limit inflationary pressures.
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Economic activity accelerated in the 4Q18. The monthly GDP expanded 4.7% yoy in December (from 5.3% in November), above our forecast (4.3%) and below market expectations (5.0%). As a result, the 4Q18 growth rate stood at 4.7% (from 2.3% in the 3Q18), taking the 2018 growth rate to 3.9% (from 2.5% in 2017).

We expect economic activity to grow 4.0% in 2019, assuming that trade tensions dissipate (benefiting metal commodity prices and, consequently, investment) and a still-expansionary monetary policy, which would offset lower fiscal impetus. The main risk to our macro outlook is the possibility of a further escalation in the trade dispute between the U.S. and China (Peru’s top two trading partners). Another downside risk is a sharp deceleration of public investment at the subnational and regional levels, as most of the newly elected officials that took office in 2019 lack experience (affecting budget execution).
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The general manager of the central bank, Juan José Echavarría, presented the first quarterly inflation report of the year, conveying an overall sense of satisfaction (with growth recovery and inflation at the target). On the positive front, inflation ended 2018 at 3.18% and is expected to be even closer to the target this year. A moderate El Niño, broadly stable Colombian peso and weak indexation would likely result in controlled inflation ahead. Growth is seen picking up from the 2.6% expected for 2018 to 3.4%-3.5% this year (near potential), boosted by investment. Sectors such as industry and commerce are growing at moderate rates, while banks are in a solid situation. 

Yet, some areas of concern or weakness persist. Inflation expectations for this year remain elevated (3.5%; Itaú: 3.4%), posing a risk to the expected inflation convergence. On the growth front, some sectors such as construction are only just beginning to recover. Meanwhile, the current account deficit is high. The technical staff expects a current account deficit at 3.7% of GDP in 2018 (3.3% in 2017) and 3.9% 2019, ending a two-year correction. The wider current account deficit is expected to be financed from increased foreign direct investment. Additionally, while the fiscal rule is expected to be met in 2019, continued adjustment must pursued for 2020 and 2021.

We believe that the central bank will maintain its holding pattern for the time being and begin a modest hiking cycle only in 2H19. A still-incipient activity recovery, risky global scenario and better-behaved inflation suggest there is no need for rate hikes in the near term.

The Week Ahead in Latam


On Wednesday, the treasury ministry will publish the federal fiscal accounts for January 2019. Last year, the treasury posted an estimated primary deficit of 2.7% of GDP, matching the official target. We expect further fiscal consolidation this year but the risk of a primary deficit larger than that targeted is high. Congress approved a zero primary deficit based on increasing revenues (through export taxes and sale of public pension fund assets) and reducing expenditures (transfers to provinces, energy subsidies and capital spending). However, a weak economy and political uncertainty pose downside risks to the fiscal accounts.

The trade balance for January will come out on Thursday. A weak currency and contraction of internal demand have led to trade surpluses in recent months. We forecast a surplus of USD 500 million in January (up from a deficit of USD 900 million deficit registered in the same month of 2018). 


The market will remain focused on the news flow about the pension reform. Local reports have indicated that president Bolsonaro agreed with setting the minimum retirement age at 65 for men and 62 for women, with a transition period of 12-14 years. The official bill with further details about the proposal will be sent to Congress on Wednesday.

On economic activity, January’s CAGED formal job creation will likely be released (date not yet specified), for which we forecast a net creation of 96k jobs. Adjusting for seasonality, our forecast implies a 70k formal jobs creation, slightly increasing the 3-month s.a. moving average from 61k to 65k. Also, FGV’s confidence surveys for February on industry (preview) and consumer sectors will be released on Wednesday and Friday, respectively.

February’s IPCA-15 inflation will be released on Thursday. We forecast a 0.30% monthly increase, leading the 12-month reading to 3.68% (from 3.77% in January). Education and food will likely post the major upward contributions to the monthly reading. On the other hand, transports and clothing are expected to post the major negative contributions.

Finally, January’s tax collection will be released throughout the week, which we expect to come in at BRL 159 bn


On Tuesday, think-tank Fedesarrollo will release its consumer confidence index for January. Consumer confidence partially recovered in December from the sharp drop into pessimistic ground in November as the eventual tax reform was not as harsh on consumers as initially thought. Nevertheless, consumers remained downbeat at -8.3%, (0 = neutral), compared to the -19.6% in November (the lowest level since March 2017). Going forward, stable inflation and mildly expansionary monetary policy would likely support private confidence, aiding the continuance of a consumption recovery. 

On Friday, the board of the central bank will hold its first meeting for the year (of four) that focuses on technical aspects other than the policy rate. The rolling-over of the put option auctions to accumulate reserves is likely. 


On Thursday, Mexico’s Central Bank (Banxico) will publish the minutes of February’s monetary policy meeting (held two weeks before), when Board members voted unanimously to leave the policy rate unchanged at 8.25%. 

Ending the week, INEGI will publish CPI inflation figures for the first half of February. We expect bi-weekly inflation to post 0.01% (from 0.21% a year ago). We expect fruits and vegetables exerted important downward pressure, while energy prices accelerated somewhat (due to an increase in power utility tariffs, while gasoline prices remained stable). Assuming our forecast is correct, headline inflation would come in at 4.00% year-over-year (from 4.21% in the second half of January).


The Central Bank will publish 4Q18’s GDP growth on Thursday, including the demand-side breakdown. According to the already-released monthly GDP, activity grew 4.7% year-over-year in 4Q18 (from 2.3% in the 3Q18). We expect public investment improved during the 4Q18 (after a weak 3Q18 due to delays in expenditure execution), while private investment remained resilient. In turn, we expect private consumption continued to grow at a decent pace, supported by consumption credit growth rate (driven by an expansive monetary policy).

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