Itaú BBA - Evening Edition – Industrial confidence still weak in Brazil

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Evening Edition – Industrial confidence still weak in Brazil

April 22, 2019

If this trend of confidence indicators moving sideways continues, it will indicate a formal job creation (CAGED) of around 20k in April.

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Business confidence in the industrial sector increased only 0.4 pp. to 97.6 in April, according to FGV’s monthly industry survey preview. The breakdown shows an increase in the current conditions index (1.0 pp), while the expectations component declined slightly in the month (-0.2 pp). Capacity utilization in the sector (NUCI) receded 0.3 pp. to 74.4%, indicating substantial spare capacity in the industrial sector. The final survey result will be released next Monday (29). If this trend of confidence indicators moving sideways (not receding, but not recovering at full steam either) continues in other sectors, it will indicate a formal job creation (CAGED) of around 20k in April, according to our study published earlier in the month.

The BCB released its weekly survey with market participants with lower GDP growth expectations for 2019 and 2020. According to the survey, the median forecast for GDP growth declined 24bps for 2019 (to 1.71%) – consistent with a slowdown of economic activity at the margin – and 8bps for 2020 (to 2.50%, now in line with our call). For 2021, growth expectations remained stable at 2.50%. The median of IPCA inflation forecasts for 2019 receded 5 bps (to 4.01%), after increasing 16bps in the previous week. For 2020 and 2021, the median of the inflation forecasts remained flat at 4.00% and 3.75%, respectively. The year-end Selic rate did not change for the three years horizon (2019-2021): at 6.50% for 2019, 7.50% for 2020 and 8.00% for 2021. The median of the forecasts for the exchange rate depreciated slightly: to BRL 3.75/USD for 2019 (from 3.70), to BRL 3.80/USD for 2020 (from 3.78), and to BRL 3.82/USD for 2021 (from 3.80).


Treasury registered a lower primary deficit in March. The federal government ran a primary deficit of ARS 13.0 billion, compared with a deficit of ARS 20.8 billion reported in March 2018. We estimate that the 12-month rolling primary deficit fell to 2.0% of GDP, from 2.4% of GDP in February 2019. The nominal deficit, which includes interest payments, was 4.9%, down from 5.4% of GDP in February. The federal government ran a surplus of ARS 10.3 billion in the first quarter of the year, exceeding the target of a surplus ARS 6.0 billion for that period (or a deficit of ARS 2.3 billion, once that target is adjusted by the increased social expenditures allowed under the agreement with the IMF). We expect the government to deliver further reduction in the fiscal deficit this year. However, we note an upward risk to our forecast of a deficit of 0.5% of GDP, after the government decided to freeze electricity tariffs for the rest of the year.
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Despite a lower-than-expected trade balance deficit in February, external imbalances continued to deteriorate. The USD 581 million deficit, which came below the Bloomberg median estimate (USD -716 million) and our forecast (USD -683 million), was wider than the USD 489 million deficit recorded one year ago. The corresponding 12-month rolling trade deficit continues to widen from the USD 7.1 billion recorded in 2018, to USD 7.8 billion at the end of February. Additionally, our own seasonal adjustment shows the deficit was wider in the quarter ending in February, at USD 10.5 billion annualized (9.9 billion in 4Q18), as weak oil energy exports offset the moderation in import growth. Imports growth is moderating. Total imports (FOB) gained 8.2% from last year, after expanding 10.4% in January, the slowest pace since April last year. Exports improved in February as the drag from oil exports moderated. Total exports grew 6.2% yoy in February, up from the 7.8% drop in January. The weakening global economy and the gradual activity recovery have hampered the outlook for external accounts. We see the 2019 current account deficit at 4.0% of GDP (3.8% in 2018). With internal demand improving and a broadly stable real exchange rate, a meaningful correction of the deficit is unlikely.
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Tomorrow’s Agenda: At 10:00 AM, INEGI will announce March’s unemployment rate. In our calculations, we expect a 3.4% unemployment rate in the period.

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