Itaú BBA - Economic activity falls further in Brazil

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Economic activity falls further in Brazil

June 17, 2019

See our Week Ahead full note at the end of this report.

Our LatAm Macro Monthly report was published on Friday, featuring scenarios for Brazil, Mexico, Argentina, Chile, Colombia, Peru, the global economy and commodities. ** Full story here.

See our Week Ahead full note at the end of this report.

Talk of the Day


According to the BCB, the IBC-Br activity index decreased 0.5% mom/sa in April, below the median of market expectations (-0.2%) and our forecast (+0.2%). Published last Friday, the result marked the fourth consecutive monthly decline, leading the index to decrease 1.5% on a quarterly basis. Compared to the same month of 2018, the index declined 0.6%. Overall, the below-expectation print reinforces the view of weak activity in the second quarter of 2019, after a sluggish start also in the beginning of the year.

Macro Scenario: We reduced our growth forecasts for 2019 (to 0.8% from 1.0%) and 2020 (to 1.7% from 2.0%), incorporating a sharper deceleration in the global economy. The pension reform bill may advance more quickly in Congress, now that changes to the proposal have been approved by party leaders and added to the report presented by the rapporteur of the Lower House’s Special Committee. We expect the reform to be approved in the Lower House in July, with a fiscal impact of about 60% of the original proposal. Considering the current slower growth in public revenues, we now anticipate worse results for the primary deficit – our primary deficit estimates have been revised to 0.9% of GDP in 2019 (from 0.8%) and 1.2% of GDP in 2020 (from 1.1%). Our year-end exchange rate forecast is unchanged at BRL/USD 3.80 in 2019. However, as the global background becomes more unfavorable, we expect the exchange rate to reach 4.00 in 2020. Conditional on the pension reform approval, we now expect a decline in the Selic rate to 5.0% in 2019 and 2020, in response to the slow recovery in economic activity and favorable inflation outlook. ** Full story here.


Activity indicators at the start of 2Q19 reinforce the challenging path for growth recovery ahead. Manufacturing dropped 1.3% yoy (+3.2% in March), closer to our call (-2.0%) than to the market expectation (1.7%). The decline was only partly explained by a notably high base of comparison and unfavorable calendar effect. Even after adjusting for seasonal and calendar effects, manufacturing posted a negative annual variation (-0.1%) for the first time this year. Meanwhile, retail sales increased 4% yoy (5.3% in March), below both the market consensus (4.5%) and our forecast (4.2%). After excluding the volatile fuel and vehicle sales, retail growth moderated to 4.6% yoy in April, from 6.9% in March, while growth in the quarter was broadly stable at 6.4%. The weaker performance leads us to expect growth of the coincident activity index (ISE) to slow down to 1.9% yoy in April (2.6% in March). Weak activity in the first third of the year suggests the impact of weakening global growth could be filtering through to the Colombian economy. ** Full story here.

The Week Ahead in LatAm


On Wednesday, the GDP figures for 1Q19 will see the light. We expect a 5.7% year-over-year drop (-0.2% qoq/sa), in line with the official monthly GDP proxy (EMAE). Most of the sectors registered declines in 1Q19, according to the EMAE, with the exception of agriculture output.

The INDEC will publish 
labor market indicators for 1Q19 on Wednesday. The unemployment rate came in at 9.1% in 4Q18. We expect the labor market to show a new deterioration on a year-over-year basis (unemployment rate in 1Q18 was 9.1%), in line with the contraction in economic activity and the job destruction registered in the first quarter of 2019. We recently adjusted our 2019 average unemployment rate to 10.5% from 10% in our previous scenario.

On Friday, the treasury ministry will publish the federal fiscal accounts for May. We estimate that the 12-month rolling primary deficit fell to 1.8% of GDP in April, from 2.0% of GDP in March. The Congress passed a budget for 2019 that targets a zero primary deficit. 


The Brazilian Central Bank's Monetary Policy Committee (Copom) meets again this Wednesday. We expect the Copom will maintain the Selic rate stable at 6.5% per year at the June meeting, given the monetary authority's unwillingness to change the level of stimulus until there is greater clarity about the prospects for economic reforms – particularly the pension reform. We believe that the Copom will only cut the Selic rate after the approval of the reform in the first round of voting in the Lower House, which we now expect to take place in July. Going forward, we believe that the combination of weak economic activity with below-target inflation and benign inflationary outlook will open up room for additional monetary stimulus, which will take the Selic rate to 5.0% in 2019, with the monetary rate unchanged at this level in 2020.

On the fiscal front, May’s tax collection may come in during the week, for which we expect a BRL 113 bn print.


Think-tank Fedesarrollo will publish consumer confidence for the month of May on Wednesday. In April, consumer confidence returned to negative territory (< 0), likely affected by the weakening Colombian peso and protests that affected transportation routes and led to higher inflation. An expansionary monetary policy  alongside low inflation could support consumer confidence, but weaker than expected growth in 1Q19 showed signs that the impact of weakening global growth could be filtering through to the Colombian economy and raises downside risks to the activity and confidence outlook.

The central bank will publish the trade balance for the month of April on Thursday. In the final month of 1Q19, a trade deficit of USD 762 million was recorded, larger than the USD 363 million deficit in March 2018. As a result, the trade deficit in 1Q19 widened from USD 1.2 billion in 1Q18 to USD 2.4 billion. Slowing oil exports and falling coal exports along with dynamic import demand led the result. As oil exports improve and import growth slows, we expect a narrowing of the trade deficit to USD 345 million (USD 762 million in March), but to remain larger than the USD 257 million deficit last year.

On Friday, the monthly coincident activity indicator (ISE) will be published for April. Activity slowed in March, posting growth of 2.6% (2.8% in February). With consumer confidence still weak and manufacturing contracting in the month, we expect ISE to grow a milder 1.9% yoy.  

The central bank holds its monetary policy meeting on Friday. We expect the board to hold the policy rate at 4.25%. General Manager Echavarria has downplayed the recent increase in inflation expectations and noted that the board was comfortable with the COP depreciation in the current volatile environment, but expressed some growth concerns. Despite the stable rates call, we cannot rule out the communication of the decision hints at further easing ahead. In particular, if risks are tilted to a widening output gap, while inflationary pressure are broadly controlled  and monetary-policy loosening by the Fed materializes, we see room for rate cuts ahead. 


Ending the week, the statistics institute (INEGI) will publish Q1’s aggregate supply, which we expect to slowdown in line with 1Q19 GDP (1.2% year-over-year, from 1.7% in 4Q18). Moreover, based on balance of payments data, we also expect real imports of goods and services to decelerate in 1Q19. 


On Saturday, the statistics institute (INEI) will announce April’s GDP proxy. We estimate the GDP proxy decelerated to 0.1% year-over-year, from 3.2% in March. We expect monthly GDP to be dragged mainly by fishing output (last year the first fishing season started in April, while this year it started in May), which in turn is expected to affect primary manufacturing. We also expect the mining sector to contract. On the non-natural resources side, we expect construction output improved, as public investment expenditure execution recovered (in real terms), while services sector grew at a decent pace.

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