Itaú BBA - Evening Edition – GDP shrinks at the margin in Brazil

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Evening Edition – GDP shrinks at the margin in Brazil

May 30, 2019

GDP declined 0.2% qoq/sa in 1Q19.

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GDP declined 0.2% qoq/sa in 1Q19, in line with market expectations and our forecast (both at -0.2%). In year-over-year terms, GDP grew 0.5% (our call: 0.4%, mkt: 0.5%). The breakdown was also broadly in line with expectations: services expanded, while industrial and agricultural production declined. On the demand side, consumption increased, while investment declined. Exports also decreased, after a positive contribution in the second half of last year. The disappointing performance of investment has been the main source of weakness – investment levels are still 27% below the pre-recession peak. For 2Q19, our preliminary forecast is a timid GDP increase of 0.1% qoq/sa, which implies a downside risk to our 1.0% growth expected for 2019.
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Tomorrow’s Agenda: On economic activity, April’s national unemployment rate (PNAD) will be released at 9:00 AM, for which we expect to come in at 12.4% (down 0.1 p.p. to 11.9% in seasonally adjusted terms). On fiscal accounts, April’s consolidated public sector primary budget balance will be published at 10:30 AM, for which we forecast a BRL 4.0 billion surplus.


The minutes of May’s monetary policy meeting, published by the central bank of Mexico (Banxico), suggest no rate cuts in the near-term. In the last encounter, held two weeks ago, board members voted unanimously to leave the policy rate unchanged at 8.25%. Deputy governor Gerardo Esquivel expressed a dissident opinion of the policy statement tone and the balance of risks for inflation again. He argued that the recent evolution of several inflation indicators, the change of the monetary policy stance of central banks in the developed world and the greater economic activity slack warranted a more neutral tone. He also suggested that the communication of the central bank on the persistence of inflation could be influencing inflation expectations, while also arguing that there has been no effect of the minimum wage increases on inflation. However, most members warned about the risks of easing monetary policy stance too soon, at a time that headline and core inflation have increased and the future path of these indicators has become more uncertain. Some members added that easing monetary policy now or signaling a move in this direction would validate the recent behavior of inflation expectations, risking central bank’s credibility and creating doubts over the monetary authority’s commitment with its inflation target. Notwithstanding, some members seem to be uncomfortable with keeping a restrictive monetary policy stance for too long, given the weakness in economic activity.

We expect Banxico to start an easing cycle only by the end of the year. We see two 25-bp rate cuts in the last quarter of 2019. Rate cuts in the short term are unlikely, given that the board still views the balance of risks for inflation tilted to the upside. Looking forward, we believe that, with inflation falling within the central bank’s target range, below-potential growth, and a looser monetary-policy stance by the Fed, the central bank will have room to start a gradual normalization cycle, as long as uncertainty abates and risks for inflation fall.
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Tomorrow’s Agenda: The national institute of statistics (INE) will release the industrial activity indicators for April at 9:30 AM. We expect manufacturing to grow 0.2% yoy in the period. At the same time, INE releases the national unemployment rate for the quarter ended in April, which we expect to come in at 6.8%, 0.1 p.p. above last year.


Tomorrow’s Agenda: At 12:00 PM, the institute of statistics will release the unemployment rate for April. We expect the indicator to come in at 11.4% (10.7% one year before). Additionally, the board of the central bank will hold a meeting that focuses on technical aspects other than the policy rate (the second of four scheduled for the year). With the notable depreciation of the Colombian peso and the IMF’s reassurance that Colombia remains eligible for a flexible credit line, some debate on the continuation of put option auctions to accumulate reserves is expected.

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