Itaú BBA - Sharp decline in mining and extraction impacts industrial production in Brazil

Latam Talking Points

< Back

Sharp decline in mining and extraction impacts industrial production in Brazil

April 3, 2019

We now forecast a 0.1% mom/sa decrease for March’s industrial production

Talk of the Day


Industrial production increased 0.7% mom/sa in February, below our call (1.6%) and the median of market expectations (1.0%), after receding 0.8% in the previous month. Notwithstanding the monthly increase, the trend remains weak, as the quarterly moving average remained virtually stable in February. In year-over-year terms, production increased 2.0% – also below our call (3.5%) and the market’s (2.4%). The result reaffirmed our expectations of a sluggish activity recovery in early 2019 – with this print and the weakness shown in other activity indicators, we now forecast a 0.1% mom/sa decrease for March’s industrial production, which would lead the year-over-year rate to -3.9%.

The index breakdown outlines weak performance in most sectors, with only 16 out of 26 industrial branches increasing. The major negative contribution came from the extractive industry, which printed a 14.8% drop in the month (responsible the most of the surprise relative to our estimate), partly due to the lower production after the Brumadinho mining dam disruption. In the manufacturing segment, the biggest decline came from the intermediary goods sector, which dropped 0.8% mom/sa. On the opposite side, the capital goods component posted the major positive contribution, with a 4.6% mom/sa growth, rebounding from the 2.6% mom/sa drop registered in the previous month.
**Full story


Weak retail activity came in line with our expectations for the month of February, but negatively surprised the market consensus. Retail sales (including vehicles) grew 0.7% over twelve months (0% in January), well below the Bloomberg market consensus of 1.5% (Itaú: 0.8%). Meanwhile, wholesale trade remained robust, still favorably led by sales of investment-linked materials. With mining contracting in the month and retail data weak, we expect the monthly GDP proxy (Imacec) to grow below potential at 2.0% in February (2.1% previously). Despite the weak activity start to 2019, we see GDP growth at 3.2% this year (4.0% last year). The composition of the data is an indication that investment is surpassing consumption as the activity driver. At the margin, retail activity declined. Retail sales (including vehicles) decelerated to -3.6% qoq/saar, from +7.6% in 4Q18 (-3.6% in 3Q18). Low consumer confidence levels and a lagged recovery of the labor market are hampering retail activity. Nevertheless, the central bank signaling low rates for longer and a prolonged period of mild inflation would aid retail dynamism going forward.
** Full story


Compared to estimates in the 2019 approved budget, the Preliminary Economic Policy Guidelines (PEPG) fiscal targets remained unchanged for 2019 and improved for 2020, while GDP growth forecast and oil production projection were revised down. Unlike the 2019 Budget approved in Congress last December, this document, published by the Ministry of Finance (MoF), doesn’t need to be approved by Congress. For 2019, the primary surplus and nominal fiscal deficit stood at 1.0% and 2.0% of GDP, respectively. In turn, for 2020, the primary surplus and nominal fiscal deficit improved to 1.3% of GDP (from 1.1% of GDP in the approved budget) and to 1.6% of GDP (from 1.9% of GDP), respectively. Moreover, MoF’s estimates of the broadest measure of debt, the historical balance of public sector borrowing requirements, remained unchanged (45.1% of GDP for 2019 and 2020). For 2019 and 2020, punctual GDP growth forecast stood at 1.6% (from 2.0% in the approved budget) and 1.9%, respectively. GDP growth forecast are closer to market consensus now, while implies a reduction in tax revenue estimates. To keep the promise of reaching the MoF’s fiscal targets, given lower fiscal revenue estimates, the MoF adjusted down fiscal expenditures.

The PEPG continues to reflect the commitment of AMLO’s government to keep responsible public finances, but execution is still a risk. Reaching MoF fiscal targets will depend on the capacity of AMLO’s administration in performing the necessary expenditure cuts (0.5% and 0.6% of GDP for 2019 and 2020, respectively). Moreover, stabilizing (and at some point increasing) oil production will be a challenge for public finances (in a context of AMLO’s energy policy, which imply less private sector participation in the energy sector). Finally, despite higher tax base at the end of 2018, we still see growth as a risk for revenues (we expect 1.4% GDP growth this year, lower than the new government’s forecast).
** Full story


Day Ahead: The central bank will release its monthly expectations survey. In the latest publication, analysts raised their inflation forecasts for 2019 to 31.9%, from 29.0%. We expect a new round of deterioration for the inflation expectations. Also today, the car-makers association (ADEFA) will release March data on production, exports and domestic sales to car dealers.


Day Ahead: At 12:00 PM, the institute of statistics (DANE) will publish exports for the month of February. We expect February exports to come in at USD 3,239 million, expanding 8% from last year.

< Back