Itaú BBA - Evening Edition – Itaú’s monthly GDP expands in November

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Evening Edition – Itaú’s monthly GDP expands in November

January 16, 2019

In our view, such weakness is caused by the lagged effect of tighter financial conditions in 3Q18 combined with the slowdown in global growth

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Itaú Unibanco monthly GDP (PM-Itaú) climbed 0.4% mom/sa in November. On a year-over-year basis, the indicator decelerated to 1.9% (from 2.1% in October) and, notwithstanding the monthly increase, also slowed down on the quarterly basis, after the period during which the base effect was impacted by the truckers’ stoppages. In our view, such weakness, particularly in the industrial sector, is caused by the lagged effect of tighter financial conditions in 3Q18 combined with the slowdown in global growth – particularly in countries that are big buyers of Brazil’s manufactured items.
** Full story

According to the IBGE’s monthly services survey (PMS), services sector real revenues remained unchanged in November (0.0% mom/sa), extending a weak trend for the third month in a row. In year-over-year terms, service sector real revenue came at 0.9%, in line with consensus (0.9%), reinforcing the outlook of weak qoq/sa growth in 4Q18.

Tomorrow’s agenda: The BCB will release its November’s monthly activity index (IBC-Br) at 8:30 AM (SP Time), for which we expect a 0.4% mom/sa increase.


Inflation decelerated once again in December, helped by the stabilization of the exchange rate. Consumer prices rose 2.6% mom, slightly below the 2.68% consensus forecast and down from 3.2% in November and 5.4% in October. The annualized three-month moving average decelerated markedly to 54.6% from 79.9% in November. Thus, annual inflation was 47.6% in December, posting the highest reading since 1991.

Existing inertia (mostly in wage negotiations) poses a major challenge to faster disinflation. While the new monetary-policy framework showed progress in the fight against inflation through exchange-rate stabilization, inflation and inflation expectations remain high, despite the recent nominal exchange rate stabilization (which implied a real exchange rate appreciation). We forecast 30% inflation this year. Uncertainty over the outcome of the presidential elections is another risk factor, as it could trigger further exchange-rate depreciation, keeping inflation high and preventing interest rates from falling.
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Tomorrow’s agenda: The treasury ministry will publish the federal fiscal accounts for December. We forecast a deficit of 2.6% of GDP, slightly below the 2.7% target for the year. For 2019, the Congress passed a budget that targets a zero primary deficit, in line with the agreement with the IMF.  


Core inflation expectations in January dipped further, the growth outlook trimmed leading to the expectation of a more gradual normalization cycle. According to the central bank’s monthly survey, the 2019 inflation expectation was stable at 3.47% (our call: 3.4%), while the 1-year outlook edged down to 3.42% (from 3.48%). The 2-year inflation expectation moved to 3.15% (3.20% in December). Expectations for core inflation (excluding food prices) fell to 3.20% from (3.31% in December) for the 1-year horizon and to 3.09% for 2-year horizon (from 3.13%), edging closer to central bank’s 3% target. Growth last year is seen at 2.6% (in line with our forecast), revised down 0.1pp from the October survey (previous version evaluating activity), while a milder improvement this year to 3.1% is now expected (3.3% previously; our call: 3.3%). Regarding monetary policy, the policy rate is still seen stable at 4.25% during 1Q19, with the first hike (to 4.5%) expected for April. However, with inflation under control, the output gap continuing to increase and the prospect of a more moderate normalization cycle by the Fed, have likely led to the delay for the second expected rate hike. In the December survey, the second hike was anticipated for June, yet respondents now see no change in June and are evenly split regarding a hike or hold in the following month (July). Beyond July, the policy rate is seen at 4.75% until yearend. During the press conference after last month’s monetary policy decision, General Manager Echavarria noted that he could not rule out a prolonged period of stable rates.  We do not expect the board to modify the policy rate for the time being. Controlled inflation, stable inflation expectations, a risky external environment and an activity recovery that has not consolidated all point to stable rates in the near term. Two hikes this year are our base case, bringing rates to 4.75%, as activity recovers. However, risks are tilted toward fewer hikes given the fragile recovery. The next monetary policy meeting will be held on January 31.

Tomorrow’s agenda: Think-tank Fedesarrollo will release its consumer confidence index for December. In November, the indicator registered the lowest level since March 2017, and was the lowest recording for the month amid the advancement of tax reform plans that initially (before revisions) planned to raise VAT on the sale of food staples. Consumer sentiment came in at -19.6%, a significant fall from -10.0% the same period last year. The retreat from November 2017 was mainly explained by consumers’ one year expectations. With final version of the tax reform not being as harsh on consumers as initially thought, confidence may recover in coming months (particularly as inflation stays low and monetary policy remains expansionary), aiding activity recovery next year.


GDP growth slowed in 3Q18, affected by sluggish performance in the Construction sector and Electricity Generation. We estimate that the economy expanded by 4% in 2018, and it will likely continue to grow at the same rate this year and next, helped by a more benign regional environment. Inflation ended 2018 below the center of the target range. We maintain our YE19 and YE20 inflation forecast at 4%, and we do not expect changes in the monetary policy rate this year.
**Full story


Consumer prices rose by 8% in 2018, due to a weaker currency and a hike in food prices. We expect a modest deceleration in inflation in 2019, remaining above the upper bound of the target range (3%-7%). Economic activity will remain weak, affected by a sluggish tourist season, lagging exports of goods and low investment. We forecast GDP growth of 1% in 2019, following a 1.9% expansion in 2018. **Full story here.

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