Itaú BBA - Evening Edition – January’s services revenues decline in Brazil

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Evening Edition – January’s services revenues decline in Brazil

March 15, 2019

Year-over-year, the index increased 3.6%

Our LatAm Macro Monthly report was published today, featuring scenarios for Brazil, Mexico, Argentina, Chile, Colombia, Peru, the global economy and commodities.
** Full story
here.

 

Talk of the Day

See our Week Ahead full note at the end of this report. 

Brazil

IBGE’s monthly services survey reinforced the outlook of weak growth in 1Q19. Services sector real revenues declined 0.3% mom/sa in January. In year-over-year terms, the indicator came in at 2.1%, between consensus and our forecasts (1.8% and 2.4%, respectively), accelerating from last month (-0.2%). Also, paper cardboard dispatches (ABPO) increased 1.6% mom/sa in February, according to our seasonal adjustment. Year-over-year, the index increased 3.6% (previous: -0.8%). Importantly, February 2019 had a higher-than-average number of working days because Carnival was held in March, and this effect may not be fully captured by the series' seasonal adjustment mechanism. With this result, our forecast for February’s industrial production declined to 1.3% mom/sa (from 1.4%).

Macro Scenario: We maintained our GDP growth forecasts at 2.0% in 2019 and 2.7% in 2020. We revised our estimate for the primary deficit in 2019 to 1.4% of GDP, from 1.3%, but maintained our 0.8% deficit estimate for 2020. This scenario strictly depends on the approval of pension reform. Our year-end forecasts for the exchange rate remained unchanged at BRL 3.80 per USD in 2019 and BRL 3.90 in 2020. We expect the IPCA to rise 3.6% in both 2019 and 2020. The Selic rate is expected to remain at 6.5% p.a. in upcoming policy meetings. However, the communication from the Monetary Policy Committee’s (Copom), now under new leadership, and the news flow on pension reform will play a key role in determining the future trajectory for interest rates.
** Full story
here.

Peru

Economic activity surprised to the downside. The monthly GDP expanded 1.6% yoy in January (from 4.73% in December), below our forecast (2.3%) and market expectations (2.4%). As a result, the three month moving average growth rate stood at 3.9% yoy in the quarter ended in January (from 4.8% in December). We expect GDP growth of 4.0% for 2019, assuming that global trade tensions dissipate (benefiting metal commodity prices and, consequently, investment) and a still-expansionary monetary policy, which would offset lower a fiscal impulse. The main risk to our macro outlook is the possibility of a further escalation in the trade dispute between the U.S. and China (Peru’s top two trading partners). Another downside risk is a sharp deceleration of public investment at the subnational and regional levels (as evidenced in January’s fiscal figures), as most of the newly elected officials that took office in 2019 lack experience (affecting budget execution).
** Full story
here.

Argentina

Treasury once again registered a primary surplus in February. The federal government ran a primary surplus of ARS 6.7 billion, compared with a deficit of ARS 20.2 billion reported in February 2018. We estimated that the 12-month rolling primary deficit totaled 2.4% of GDP, down from 2.6% in January 2019. The nominal deficit, which includes interest payments, was 5.4% of GDP. Although a sharp reduction of the fiscal deficit is likely, it will be challenging for the treasury to meet the zero-primary-deficit target for 2019. We recently revised our projection for the primary balance downward to a deficit of 0.5% of GDP this year (from 0%). We note that the agreement with the IMF allows for deviations (capped at 0.4% of GDP) due to investments financed by multilateral institutions and additional social expenditures.
** Full story
here.

The Week Ahead in LatAm

Argentina

The GDP figures for 4Q18 will see the light on Thursday. We expect a 6.4% yoy drop, in line with the official monthly GDP proxy (EMAE). If this figure is correct, the GDP fell 2.6% yoy in 2018. 

The INDEC will publish the labor market indicators for 4Q18 also on Thursday. Unemployment rate came in at 9.0% in 3Q18. We expect the labor market to show a new deterioration on a year-over-year basis (unemployment rate in 4Q18 was 7.2%), in line with the contraction in economic activity and the job destruction registered in the last months of 2018. We foresee the 2018 average unemployment rate at 9%. 

Brazil

The BCB’s Monetary Policy Committee (Copom) will publish its monetary rate decision on Wednesday. With inflation forecasts anchored around the respective targets up to 2021, in a context where the level of slack in the economy remains high, we believe that the Copom will keep the Selic rate stable at 6.5% p.a. The committee will probably emphasize that the conduction of monetary policy will remain vigilant and preserve flexibility to react to deviations from the base case scenario.

On economic activity, February’s CAGED formal job creation will likely be released (date not yet specified), for which we forecast a net creation of 150k jobs. Adjusting for seasonality, our forecast implies a 42k formal jobs creation, decreasing the 3-month s.a. moving average from 46k to 35k. Additionally, BCB’s monthly activity index (IBC-Br) for January will come out on Monday - our preliminary forecast points to a 0.2% mom/sa decline, leading the year-over-year rate to a 1.2% increase.

Finally, local news indicates that the proposal for military pensions may be sent to Congress on Wednesday. The rapporteur for the pension reform at the Constitutional and Justice Committee may also be indicated throughout the week.

Chile

On Monday, the central bank will publish GDP data for the final quarter of 2018. Following a strong beginning of the year (4.9% growth rate in 1H18), there was a slowdown in the third quarter of the year (2.8% yoy). Nevertheless, signs are that activity recovered at the close of the year, lifted by investment (considering robust imports of capital goods and positive credit performance) and services. The monthly GDP proxy series (IMACEC) is consistent with a 0.8% gain (SA) from 3Q18 and an annual growth of 3.3% in 4Q18, resulting in growth of 4% for the year (1.5% for 2017).

On the same day, the central bank will also publish the 4Q18 current account balance. Falling oil prices aided an improvement in the trade balance of goods (USD 713 million surplus vs. USD 5 million deficit in 3Q18), while the income deficit likely moderated from 3Q on the back of lower copper prices. Overall, we expect the current account deficit to be USD 2.3 billion, larger than the USD 370 million deficit recorded one year before. If this is the case, the current account deficit for the year would have risen from 1.5% of GDP in 2017 to around 2.8% last year.

Colombia

On Tuesday, think-tank Fedesarrollo will release its consumer confidence index for February. Consumer sentiment improved to -2.8% in January from -5.4% one year before. The continued recovery of consumer confidence is in line with the passing of a more-consumer friendly tax reform in December than initially expected as well as some strengthening of the Colombian peso. Going forward, stable inflation and mildly expansionary monetary policy would likely support private confidence, aiding consumption recovery.

On Wednesday, the central bank will publish the trade balance for the first month of 2019. Last year a trade deficit was recorded in every month, leading to a widening of the trade deficit (ending two years of correction). Imports continued to recover in the final quarter of 2018, growing at a double-digit rate. Meanwhile low oil prices hampered exports. The trade deficit for 2018 was USD 7.1 billion, up from the USD 6.1 billion in 2017. We expect a trade deficit of USD 1.0 billion (USD 386 million deficit last year), as oil exports remain a drag. 

On Friday, the central bank will hold its second monetary policy meeting of 2019. We expect no change of status-quo, with stable rates remaining likely for still some time. Supporting this stance would be low inflation, inflation expectations edging closer to the target, the negative output gap continuing to widen as the activity recovery is gradual and the external environment remains risky.

Also on Friday, the coincident activity indicator (ISE) for the month of January will be released. In December, ISE grew a weak 1.9% (3.5% previously). For January, we expect the original series to pick up to grow at a stable 3.0% yoy, driven by retail sales and manufacturing.

Mexico

On Thursday, the statistics institute (INEGI) will publish Q4’s aggregate supply whose growth we estimate at 1.9% yoy (from 3.6% in the 3Q18). We already know that real GDP expanded 1.7% yoy in 4Q18. Moreover, based on balance of payments data, we estimate that real imports of goods and services expanded 2% year-over-year in 4Q18.  

Ending the week, INEGI will publish CPI inflation figures for the first half of March. We expect bi-weekly inflation to post 0.29% (from 0.30% a year ago). We anticipate non-core food prices continued to exert downward pressure (although less than recent past figures). However, gasoline prices have increased since the 2H of February, pressuring non-core CPI (in this context the Ministry of Finance activated the fiscal stimulus to gasoline prices last week, to moderate the increase in prices). Assuming our forecast is correct, headline inflation would be 3.98% year-over-year (from 3.99% in the second half of February).



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