Itaú BBA - GDP expands 0.1% in 4Q17 and 1.0% in 2017

Macro Brazil

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GDP expands 0.1% in 4Q17 and 1.0% in 2017

March 1, 2018

Better underlying growth than suggested by the headline quarterly result

Brazilian GDP expanded 0.1% qoq/sa in 4Q17 and 2.1% yoy, in line with our estimate (0.1%) and below the median of market expectations (0.3%).

Notwithstanding a seemingly-weak reading at the margin, 4Q17 GDP led to 1.0% growth in 2017 and consolidated the rebound in economic activity.

We forecast 3.0% growth in 2018, assuming that reforms, especially the pension reform, will make progress ahead.

Underlying growth is better than suggested by the headline quarterly result

GDP expanded 0.1% qoq/sa in 4Q17, in line with our estimate (0.1%) and below the median of market expectations (0.3%). Year-over-year growth reached 2.1%.

The seemingly-weak reading at the margin suggests a slowdown vs. the previous three quarters of the year (1Q17: 1.3%, 2Q17: 0.6%, 3Q17: 0.2%).

However, GDP components and other indicators suggest a favorable scenario. Household spending advanced for a fourth consecutive quarter, by 0.1% in 4Q17. Investments increased for a third consecutive quarter, by 2.0%. Monthly activity indicators — such as industrial production, retail sales, service sector real revenue, and net formal job creation — show that growth became more widespread during 2017. Confidence indicators are also going up, in a dynamic that continues in early 2018.

Importantly, weaker GDP growth in seasonally-adjusted terms in the second half of 2017 is related to the accounting treatment of the huge crop in the first half. Consequently, GDP readings for the beginning of the year were much higher than underlying growth, while the opposite took place in the second half.

From a supply standpoint, agricultural GDP was stable during the quarter, while industrial and service GDP climbed 0.5% and 0.2%, respectively.

Given the abovementioned issues with seasonally-adjusted quarterly growth figures, it is worth analyzing the year-over-year result. Out of 12 GDP components from a supply standpoint, 10 advanced in 4Q17 vs. 4Q16. The dispersion of expanding sectors signals that the recovery is not limited to a few economic segments.

GDP growth resumes in 2017, led by agriculture and household spending

GDP increased 1.0% in 2017 vs. 2016, the best annual pace since 2013.

From a demand standpoint, growth was led by higher household spending, which also climbed 1.0%. Government spending and investment fell 0.6% and 1.8% respectively. Both exports and imports went up sharply (5.2% and 5.0%, respectively). We point out that the decline in investment during the year results from negative statistical carryover from 2016.

From a supply standpoint, agricultural production posted a noteworthy 13.0% annual gain during the year, while industrial production was stable and the service sector advanced moderately by 0.3% in 2017.

Outlook for economic activity

We forecast 3.0% growth in 2018, with additional tailwinds from falling interest rates and improved household and corporate balance sheets. Importantly, the sustainability of these two drivers depends on confidence that reforms will make progress, particularly the pension reform. The global environment is also key to the Brazilian scenario. We expect strong growth, especially in advanced economies, along with a gradual withdrawal of monetary stimuli.

Our preliminary forecast for Brazilian GDP growth in 1Q18 is 1.0% qoq/sa and 2.4% yoy.


Artur Manoel Passos
Alexandre Gomes da Cunha

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