Itaú BBA - We reduced Brazil´s GDP growth forecasts for 2019 and 2020

Latam Talking Points

< Back

We reduced Brazil´s GDP growth forecasts for 2019 and 2020

April 15, 2019

Our LatAm Macro Monthly report was published on Friday, featuring scenarios for Brazil, LaTam, the global economy and commodities.

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

Talk of the Day

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

Brazil

Macro Scenario: We reduced our GDP growth forecasts for 2019 (to 1.3% from 2.0%) and 2020 (to 2.5% from 2.7%), incorporating weaker data and signs of a slowdown at the margin. Our estimates for the primary budget deficit worsened to 1.5% of GDP from 1.4% in 2019 and to 1.0% from 0.9% in 2020. This scenario is strictly dependent on the approval of the pension reform. Our year-end forecasts for the exchange rate are unchanged at 3.80 reais per dollar in 2019 and 3.90 in 2020. We expect the IPCA to rise 3.6% in both 2019 and 2020. Also strictly conditional on the approval of the pension reform, we now expect the Selic benchmark interest rate to drop to 5.75% in 2019 and 5.5% in 2020, in response to the sluggish recovery in economic activity.
** Full story
here.

Real services sector revenues receded 0.4% mom/sa in February, following a decline of the same magnitude in January. In year-over-year terms, service sector revenue increased 3.9% (mkt estimate: 4.0%; our forecast: 5.1%). The result reinforces the scenario of weak GDP growth in the beginning of the year – our GDP tracking for 1Q19 continues to point to a 0.1% qoq/sa decline.

Itaú Unibanco monthly GDP (PM-Itaú) remained virtually stable on a seasonally-adjusted basis in February, expanding 2.4% in year-over-year terms. From a demand standpoint, household spending as well as fixed capital investments receded during the month. For now, we expect PM-Itaú to decline 0.2% mom/sa in March.
** Full story
here.

Day Ahead: On the fiscal side, the government will send the budgetary guidelines law (LDO) for 2020 on Monday. The government may change the primary deficit target, currently at 100 BRL bln (-1.3% of GDP) for the public sector, given disappointments on economic growth and conservatism with extraordinary revenues forecasts. Importantly, the government will publish guidelines for the minimum wage value (which indexes most social security benefits) and public servants pay rises. With the need to continue with a gradual fiscal adjustment, we expect the guidelines to indicate a minimum wage increase equal to the inflation rate, and that public servants pay rise will, at first, not be allowed next year. On economic activity, BCB’s monthly activity index (IBC-Br) for February will come out at 8:30 - our forecast points to a 0.1% mom/sa decline, leading the year-over-year rate to a 3.5% increase.

Colombia

Activity indicators for the month of February were solid, as retail sales and manufacturing grew above expectations. Retail growth of 5.7% yoy (from 3.1% in January) exceeded the 4.2% market consensus and our 5.0% forecast. Meanwhile, manufacturing grew 2.8% yoy (3.0% in January), above the market consensus of 2.4% and our 1.8% estimate. Despite upbeat high frequency activity in recent months, the evolvement of the coincident activity indicator (ISE) has indicated the activity recovery is not consolidated. Hence, with low inflationary pressures, we expect the central bank to keep the policy rate stable for the remainder of this year at a mildly expansionary level.

At the margin, activity improved, with retail sales (excluding fuels and vehicle sales) growing 2.9% qoq/saar (1.5% in 4Q18). The strong retail data comes despite depressed consumer sentiment (according to think-tank Fedesarrollo), dragged down by an unfavorable one-year outlook for the economy as well as the respondent’s evaluation of their current well-being. Industrial production gained track for the second consecutive month, but momentum in the moving quarter remains weak, having contracted 8.4% qoq/saar (6.3% fall in 4Q18). Going forward, some signs of a labor market recovery and conditions in place to boost real wage growth could support a confidence improvement and maintain retail activity solid. We see growth of 3.3% this year (2.7% last year), with the recovery aided by lower inflation (benefiting real wages) and a mildly expansionary monetary policy. Nevertheless, weak global economic growth is a key risk.

Peru

The Central Bank of Peru (BCRP) decided to keep the reference rate at 2.75% in April, in line with both our call and market expectations. The board expects annual inflation around the 2% central bank target. As in previous communication, the BCRP believes that it is appropriate to maintain an expansionary monetary policy as long as inflation expectations remain anchored in a context of below-potential economic activity growth. April’s communique tone remained practically unchanged compared to last month statement. Non-primary economic activity still shows signs of dynamism. However, the central bank repeated that the level of output is still below potential. Regarding the external environment, the statement maintained a cautious stance on global economic activity, while observing less volatility in international markets (important for the Peruvian partially dollarized economy).

We expect the BCRP to deliver two 25-bp rate hikes in 4Q19. Given weaker growth in the core economies, the more accommodative stance of the Fed and well-behaved inflation, we think the central bank can afford to wait before removing its stimulus until it has more clarity on the economic outlook.
** Full story
here.

Day Ahead: The statistics institute (INEI) will announce February’s GDP proxy. We estimate that the GDP proxy expanded 3.1% year-over-year, from 1.6% in January.

The Week Ahead in LatAm

Argentina

On Tuesday, the INDEC (the official statistical agency) will publish the National CPI for March 2019. The consulting firm Elypsis, which tracks prices, has projected a new sequential acceleration in headline inflation for March (4.1% mom). If Elypsis forecast were correct, annual inflation would have reached 53.9% in March 2019.

Also on Tuesday, 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. We expect the report to shed light on the monetary policy framework based on monetary aggregates. 

Brazil

On economic activity, March’s CAGED formal job creation will possibly be released next week (date not yet specified), for which we forecast a net creation of 44k jobs. Adjusting for seasonality, our forecast implies 40k formal jobs creation, leaving the 3-month s.a. moving average virtually stable at 42k. Going forward into 2Q19, the recent drop in business confidence indicates risks that formal job creation may decelerate to a pace below this 40k level estimated for March.

Additionally, BCB’s monthly activity index (IBC-Br) for February will come out on Monday - our forecast points to a 0.1% mom/sa decline, leading the year-over-year rate to a 3.5% increase.

On the fiscal side, the government will send the budgetary guidelines law (LDO) for 2020 on Monday. The government may change the primary deficit target, currently at 100 BRL bln (-1.3% of GDP) for the public sector, given disappointments on economic growth and conservatism with extraordinary revenues forecasts. Importantly, the government will publish guidelines for the minimum wage value (which indexes most social security benefits) and public servants pay rises. With the need to continue with a gradual fiscal adjustment, we expect the guidelines to indicate a minimum wage increase equal to the inflation rate, and that public servants pay rise will, at first, not be allowed next year. Lastly, tax collection for March may come out during the week. We expec t a 112. 7 BRL bln collection (2.1% yoy real increase).

Regarding political news, the Lower House’s Constitutional and Justice Committee is expected to vote the pension reform report between Tuesday and Wednesday, but, according to the local reports, political noises might delay the process.

Colombia

Consumer confidence for the month of March will be published on Wednesday. According to think-tank Fedesarrollo, an unfavorable one-year outlook for the economy as well as the respondent’s evaluation of their current well-being resulted in consumers remaining pessimistic in February. Consumer confidence was at -5.6% in February (0 = neutral) compared to the -7.8% one year earlier and -2.8% in January. The still slow activity recovery amid a loose labor market may partly explain why confidence remains low and poses a risk to the activity recovery.

Peru

Beginning the week, the statistics institute (INEI) will announce February’s GDP proxy. We estimate that the GDP proxy expanded 3.1% year-over-year, from 1.6% in January. On the non-natural resources side, we expect construction output decelerated, as public investment expenditure execution weakened (mainly in regional governments), while the services sector grew at a decent pace. On the other hand, natural resources sector is expected to be dragged down by a fall in fishing output, which in turn is expected to affect primary manufacturing (mainly fish flour). In turn, we expect the mining sector to improve slightly.



< Back