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Monthly GDP reaffirms weak activity in Brazil

April 16, 2019

Additionally, the government presented its budgetary guidelines law (LDO) proposal for 2020 to Congress, in line with our call.

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The BCB’s monthly GDP proxy (IBC-Br) decreased 0.7% mom/sa in February, below our call and the median of market expectations (-0.1% and -0.3%, respectively). Relative to the same month in 2018, the index rose 2.5% (itaú: 3.5%; bbg: 2.9%). On a quarterly basis, the index decreased 0.2%. The result reinforces our assessment of weak economic activity in early 2019.

The government presented its budgetary guidelines law (LDO) proposal for 2020 to Congress. The proposal increases the primary deficit target for the public sector to BRL 119 bn (-1.5% of GDP), from BRL 100 bn (-1.3% of GDP) previously, following disappointments with economic growth and conservatism with extraordinary revenues forecasts. For the central government, the target changed to BRL 124 bn (-1.6% of GDP) deficit, from BRL 110 bn (-1.4% of GDP). For states, municipalities and state owned companies, the target went to a BRL 9 bn surplus (0.1% of GDP), from BRL 14 bn surplus (0.2% of GDP).Importantly, the minimum wage is proposed to increase only in line with the inflation rate, while civil servants pay rises would not be allowed next year, in line with a gradual fiscal adjustment. Each measure allows the government to save around BRL 6 bn next year, totaling BRL 12 bn in savings.

We expect primary deficits at BRL 77 bn (-1.0% of GDP) for the public sector and BRL 93 bn (-1.2% of GDP) for the central government in 2020. The difference comes mostly from extraordinary revenues, for which we account BRL 38 bn (in line with the historical average) that may come from Eletrobras privatization, oil fields and 5G telephone auctions. This expectation is conditional on the approval of the pension reform.

The BCB released its weekly survey with market participants (Focus), with higher inflation expectations for this year and lower GDP growth expectations for 2020. According to the survey, the median of IPCA inflation forecasts for 2019 increased 16 bps to 4.06%. For 2020 and 2021, median inflation forecasts remained flat at 4.00% and 3.75%, respectively. The median forecasts for GDP growth declined to 1.95% for 2019 (from 1.97%), to 2.58% for 2020 (from 2.70%), and remained stable at 2.50% for 2021. 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 remained stable for 2019 (at BRL 3.70/USD) and 2021 (at BRL 3.80/USD). For 2020, the median of exchange rate forecasts increased to BRL 3.78/USD (from BRL 3.75/USD).


The minutes of the decision to keep the policy rate at 3.0% in March reaffirm the view that higher rates are still expected in the medium-term, but low inflation has led to a long pause in the normalization cycle. The board was unanimous in its decision, and stable rates was the only option discussed. This is the first meeting since June 2018, when the option to hike was not on the menu. The updated scenario in the Inflation Report (IPoM; published the following working day after the decision) showed that a slower convergence path for inflation to the target and risks tilted to the downside on the external front warranted a more gradual normalization cycle. In the IPoM, the central bank indicated that the policy rate is likely to be kept unchanged, at 3.0%, for at least the next two quarters, while neutral levels (currently estimated by authorities at 4%-4.5%) are expected to be reached towards the end of the policy horizon (around 1H21). In December’s report, the policy rate was expected to reach neutral a full year earlier (first half of 2020). The board explained that this flexibility of strategy displays the cautious approach it had proposed for this cycle. We expect only one further 25-bp rate hike this year (in 4Q19), taking the policy rate to 3.25%. Low inflation, the looser policy stance by the Fed and risks to global economic growth suggest there is no need to remove stimulus rapidly in the near term. Two further hikes during 2020 are expected, assuming the economic recovery endures.
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Economic activity decelerated in the quarter ended in February.The monthly GDP expanded 2.1% yoy in February (from 1.6% in January), taking the three month moving average (3mma) growth rate to 2.9% yoy (from 3.9% in January). Fishing, construction and metallic mining output were the main drags to economic activity in February. Non-natural resource sectors, which account for three quarters of the economy, decelerated to 2.5% yoy in February (from 3.6% in January), taking the 3mma growth rate to 3.4% yoy (from 4.1%). At the margin, both natural and non–natural resource sectors weakened. Using our own seasonally adjusted series, the quarter-over-quarter annualized growth rate stood at -1.7% (from 3.0% in January) for the full GDP. We expect GDP growth of 4.0% for 2019, assuming that global trade tensions dissipate and a still-expansionary monetary policy, which would offset a lower fiscal impulse. In particular, we expect private investment (mainly from mining) to support economic activity during 2019. Besides global factors, a downside risk for the economy is a prolonged deceleration of public investment at the subnational and regional levels, as most of the newly elected officials who took office in 2019 lack experience (affecting budget execution).
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Day Ahead: At 4:00 PM, the INDEC (the official statistical agency) will publish the National CPI for March 2019. The consulting firm Elypsis, which tracks prices, forecasts more acceleration in headline inflation for March (4.1% mom). If Elypsis forecast were correct, annual inflation would have reached 53.9% in March 2019. On monetary policy, the central bank will publish its quarterly monetary policy report. The purpose of the report is to illustrate how the monetary authority perceives the inflation dynamic, anticipates the evolution of prices, and explains the rationality of its monetary decisions.

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