Itaú BBA - Evening Edition – Brazilian GDP growth confirms weak activity in 2018

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Evening Edition – Brazilian GDP growth confirms weak activity in 2018

February 28, 2019

We expect GDP to grow 2.0% in 2019 and 2.7% in 2020, assuming reforms advance. Importantly, the earliest indicators for 1Q19 add downside to our call

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GDP expanded 0.1% qoq/sa in 4Q18, in line with expectations, and 1.1% yoy, below the market expectations but close to our forecasts. The reading reinforces the perception of weak growth in late 2018. GDP growth in 2018 was the same as in 2017. The recovery that began in 2017 remains timid when considering the GDP decreases in 2015 (-3.5%) and 2016 (-3.3%).

Looking ahead, we expect GDP to grow 2.0% in 2019 and 2.7% in 2020, assuming progress in reforms. Importantly, the earliest indicators for 1Q19 add downside to our call.
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Still on activity indicators, CAGED registered a net creation of 34.3k jobs in January, well below our call (+100k) and the market’s (+86k). Seasonally-adjusted, 25.6k formal jobs were created in January, taking the 3-month moving average to 50k (from 58k in the previous month). The sectorial breakdown shows gains in the services, retail and manufacturing sector, while the civil construction declined in January. Similar to PNAD’s unemployment figure for January, the CAGED report reinforces the outlook of weak activity growth in early 2019.

On fiscal accounts, the consolidated public sector posted a primary surplus of BRL 46.9 billion in January, slightly below our call (48.8 billion) but higher than market consensus (41.1 billion). The central government had a surplus of BRL 30.2 billion, missing a bit our 31.8 billion estimate, while regional governments and state-owned companies posted surpluses of BRL 10.8 billion and BRL 0.5 billion, respectively, that came in line with expectations. The consolidated primary deficit over 12 months remained at 1.6% of GDP, the same as in December. The January report stresses that meeting the annual primary deficit target for the public sector of BRL132 billion requires discipline, but shouldn’t be challenging.

The general government’s gross debt was stable vs. December, at 76.7% of GDP in January, while the public sector’s net debt increased to 54.0% of GDP from 53.8%. The nominal deficit narrowed to 6.8% of GDP from 6.9%, 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.

Tomorrow’s Agenda: February’s trade balance will be released at 3:00 PM, for which we forecast a USD 4.1 billion surplus.


Activity declined more than expected in December. The EMAE (official monthly GDP proxy) decreased by 7.0% yoy in December, leading to a 2.6% contraction in 2018, missing our GDP forecast of 2.2% and central bank survey expectations of 2.4% yoy. On a sequential basis, the economy grew 0.7% mom/sa, bringing the quarter-over-quarter contraction to 6.8% (annualized) in 4Q18 (vs. a contraction of 3.2% in 3Q18). The statistical carryover for 2019 is -3.1%. Indec (official statistics agency) is scheduled to publish the national accounts for 2018 on March 21.

We revised our GDP growth forecast for this year downward. Expected weaker internal demand, due to higher interest rates and the large negative statistical carryover, will likely offset the long-awaited sequential recovery of the economy after a 1Q19 driven by the soy harvest. We now forecast a contraction of 1.2%, vs. 0% in our previous scenario.
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Tomorrow’s Agenda: February’s tax collection will see the light. We expect an increase of 40% yoy to ARS 330 billion.


The labor market continued to show a mixed performance at the beginning of 2019. The unemployment rate for the quarter ending in January came in at 6.8%, in line with expectations, but was 0.3pp higher than one year earlier. Meanwhile, job creation moderated to 0.6% yoy, from 0.7% in 4Q18, the lowest since the quarter ended in November. Complementary sources of information (capturing formal employment) that the central bank monitors show mixed results. Given labor market dynamism generally lags the economic recovery, last year’s activity pick-up, along with expectations that recovery consolidates throughout this year, some improvement of labor market dynamics ahead is likely.

We see some tightening of the labor market (unemployment to 6.7%, below last year’s 7%) this year as it benefits from the lengthy activity recovery. We note that the Institute of Statistics is in the process of revising labor statistics, gradually updating samples on the back of information collected in the 2017 Population Census and crosschecking with complementary data sources (some pointing at higher employment growth).
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Manufacturing started 2019 on a better than expected footing. Yet, industrial production (aggregating mining, manufacturing and utilities) decreased 0.8% yoy in the first month of this year (+1.6% in December), dragged down by mining. Manufacturing grew 2.7% in January, far above our 0.3% forecast (also the market median expectation), as growth in December was sharply revised from 0.8% to 2.7%. Going forward, growth may be adversely affected by harsh weather in February, which resulted in mining operations interruptions, consolidating the view of a weaker 1Q19 (relative to the end of last year).

Recovering sentiment and improving copper prices point to favorable activity dynamics in the short term. Robust imports of capital goods, upbeat manufacturing of machinery and equipment as well as positive credit results favor an investment-led consolidation of the recovery. However, uncertainty regarding inflation dynamics and still elevated external risks support a more cautious central bank, the likelihood of further rate hikes during the remainder of the first semester is low.
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Tomorrow’s Agenda: Banxico will release its expectations survey for February at 12:00 PM.


Tomorrow’s Agenda: At 3:00 PM, the statistics institute (INEI) will announce February’s CPI, which we forecast at 0.24% mom, leading the annual headline inflation to 2.12% yoy in the month.


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