Itaú BBA - Evening Edition – Higher-than-expected service sector revenues in Brazil

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Evening Edition – Higher-than-expected service sector revenues in Brazil

September 12, 2019

The more important components for our GDP tracking declined in the month, but the drop was softer than previously expected

Talk of the Day


The service sector revenues (PMS) increased 1.8% yoy in July, stronger than our forecast and market expectations, both at 0.4%. At the margin, the indicator climbed 0.8% mom/sa. Looking at the breakdown, the more important components for our GDP tracking declined in the month, but the drop was softer than previously expected. Services offered to families decreased 0.9% mom/sa, while professional and administrative services declined 1.8% mom/sa. Looking forward, our 3Q19 GDP tracking improved to +0.2% qoq/sa, from 0.0%, removing, at least for now, the downside bias to our 0.8% GDP growth forecast for 2019.

Tomorrow’s Agenda: On economic activity, BCB’s monthly activity index (IBC-Br) for July will come in at 9:00 AM – our forecast points to a 0.1% mom/sa gain, leading the year-over-year growth rate to 1.6%.


Macro Scenario: Activity in 2Q19 was weak and showed slowing consumption, while investment gained momentum. Considering the current set of data, we now see growth coming in at 2.2% this year (from 2.4% previously and 4% last year). The added monetary and fiscal stimulus measures would support some recovery in 2020, to 2.9%. On the inflation side, we expect core service inflation to continue rising only gradually toward the target. However, the recent upside surprises will likely help headline inflation to end the year at the 3.0% target (2.8% expected previously; 2.6% in 2018). Next year, we see inflation at 2.8% as the continued widening of the output gap limits inflationary pressures. On monetary policy, the central bank cut the policy rate by another 50 bps, to 2.0%, and surprisingly signaled that more easing could come. Looking forward, we now expect the easing cycle to end with the policy rate at 1.5% (2% previously), but the timing of additional cuts is unclear. ** Full story here.


Macro Scenario: The MoF submitted the 2020 budget to Congress with responsible fiscal targets, but the odds of fiscal slippage are high due to optimistic macro assumptions. On economic activity, we revised our GDP growth forecast for 2019 to 0.4%, from 0.6%. Weak economic activity in the U.S. is expected to drag down Mexico’s manufacturing sector. Moreover, uncertainties over the direction of domestic policy and trade relations with the U.S. are also expected to continue to weigh on investment. On monetary policy, we expect Banxico to cut the policy rate by another 25 bps in September, with two additional 25-bp cuts at the subsequent meetings of 2019, bringing the rate to 7.25% by year-end. Given the poor evolution of the global economy and its impact on the Fed and on Mexico’s economic activity, we expect no pauses in the cycle in the short term. For 2020, we forecast four 25-bp rate cuts. ** Full story here.


Tomorrow’s Agenda: At 12:00 PM, activity indicators for the month of July will be published. We expect retail sales to grow 9.0% in twelve months (7.2% in June), despite low consumer confidence and a weak labor market as auto sales bounced and the base of comparison if more favorable. Meanwhile, industrial production is set to grow 3.8% in the month (from a 1.1% decline in June).

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