Itaú BBA - Evening Edition – Economic activity drops further in Brazil

Latam Talking Points

< Back

Evening Edition – Economic activity drops further in Brazil

May 15, 2019

According to BCB, the monthly GDP proxy index (IBC-Br) decreased 0.3% mom/sa in March.

Talk of the Day


According to BCB, the monthly GDP proxy index (IBC-Br) decreased 0.3% mom/sa in March, slightly below our forecast and the median of market expectations (both at -0.2%). The result marked the third consecutive monthly decline, leading the indicator to decrease 0.7% on a quarterly basis. Relative to the same month in 2017, the index fell 2.5% (itaú: -2.3%; market: -2.2%). These results reinforce our call of a GDP contraction in 1Q19 – see our study below.

Macro Vision: Given the widespread weakness shown in recent activity indicators, we expect the first quarter’s GDP to shrink 0.2% qoq/sa (+0.4% yoy). From a demand standpoint, we anticipate a slight increase in household spending, to be offset by falling investment levels. Looking at the supply standpoint, we expect a small increase in services and contractions in the industrial and agricultural sectors. Recent developments in economic activity reinforce our view that the fiscal adjustment and reduction in credit subsidies have been contributing to a decline in the neutral interest rate.
** Full story


Activity in the first quarter of 2019 came in below expectations and showed a notable momentum slowdown. Activity increased 2.8% year-over-year in 1Q19 (2.7% in 4Q18), below the 3.0% market consensus and our 3.4% call. After adjusting for seasonal and calendar effects, GDP grew an even milder 2.3% from last quarter (2.7% in 4Q18). The bulk of the surprise to our call came from weaker construction and public administration. Additionally, growth for 2018 was revised down 0.1pp to 2.6%. At the margin, activity came to a halt (0% qoq/saar vs. 2.8% in 4Q18), the slowest pace since 1Q17. Construction and manufacturing drove the activity slowdown, only partly offset by the natural resources-related bounce back.

We expect activity to improve from last year, but downside risks to our outlook are rising. The recovery to 3.1% (2.6% for 2018) would be aided by the monetary stimulus, recovering real wage growth (given low inflation) and upbeat private sentiment. Nevertheless, lower global growth following heightened trade war tensions could lead to an even milder recovery. Overall, an output gap that is still widening and growing external risks to the recovery point at the central bank retaining a mildly expansionary monetary policy going forward.


Headline inflation decelerated in April, driven by mostly regulated prices and seasonal food products. Consumer prices rose 3.4% mom from March, down from 4.7% in the previous month and lower than the 4.0% market consensus. Nevertheless, the annualized measurement of the last three months continued to rise, to 59.5% (from 56.4% in March), and the annual reading marked a new record high (55.8%). Core item prices also eased – core inflation came in at 3.8% mom (down from 4.6% in March), led once again by food and beverages. At the margin, the core reading is running at an annualized 61.9% (last three months), up from 57.0% in March. The last twelve-month inflation reading jumped to 58.0%, from the previous 55.6%.

Inflation is expected to continue falling in May. The price-tracking consulting firm Elypsis estimates a 3.0% mom increase in consumer prices for the current month, due to the lower statistical carry-over effect in April, but still affected by hikes in gas and water tariffs and medical services. The government expects further deceleration in the coming months, given tight monetary policy, the implementation of some income policies (mainly the freezing of electricity and transportation tariffs), and expectations for a more stable nominal exchange rate (the monetary authority announced it will sell dollars even if the exchange rate is trading stronger than the upper bound of the old non-intervention zone). We expect a 40% year-over-year increase in consumer prices by December, which also means some disinflation ahead. However, we note that further exchange-rate instability and stronger indexation in wage negotiations still represent significant challenges.


Economic activity decelerated in 1Q19. The monthly GDP proxy expanded 3.2% yoy in March (from 2.1% in February), above our forecast of 2.9% and market expectations of 3.1%, taking the 1Q19 growth rate to 2.3% yoy (from 4.8% in the 4Q18). At the margin, 1Q19 GDP also weakened. According to Peru’s statistics institute seasonally adjusted series, the GDP quarter-over-quarter annualized growth rate stood at -2.5% in 1Q19 (from 7.7% in 4Q18). For 2019, we expect a 3.8% GDP growth, reflecting an escalation of the US/China trade war. Besides global factors, another downside risk for the economy is a prolonged deceleration of public investment at the subnational and regional levels, as most of the newly elected officials who took office this year lack experience. In turn, we expect an expansionary monetary policy to support the economic activity, which would offset the lower fiscal impulse.
** Full story


Tomorrow’s Agenda: At 3:00 PM, the Central Bank of Mexico (Banxico) will publish its May decision on the reference rate. We expect Banxico to remain on hold at 8.25%. Given the recent upside surprises in inflation, we believe Banxico’s board (or at least most of its members) will continue to adopt a cautious tone (in particular, maintaining the view that the balance of risks for inflation is tilted to the upside).

< Back