Itaú BBA - Itaú Activity Surprise Index - Overall weakness in activity, especially in Colombia

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Itaú Activity Surprise Index - Overall weakness in activity, especially in Colombia

October 4, 2016

The South American economies are still lacking in performance.

Our Itaú Activity Surprise Index registered -0.16 in September, a fall from the 0.04 registered in August. Mexico continues to outperform its peers, but delivered more negative surprises over the month of September. The rest of the South American economies are still lacking in performance. Colombia is the negative highlight, posting its second to worst result in the series’ history, with very weakpek activity figures in July, as its economy continues to adjust to the terms of trade shock.

The Itaú Activity Surprise Index compares trends in economic activity indicators released during the month to what analysts had been expecting for them. It is a GDP-weighted average of separate indexes for Brazil, Mexico, Chile, Colombia and Peru. An above-zero reading means favorable surprises. Below zero means disappointment. The index is a three-month average in order to avoid excess volatility. Surprises in activity often trigger revisions in GDP growth estimates.

Brazil’s index scored -0.18 in September, deteriorating from 0.04 in August, pulled down by weak labor market and consumption indicators, which is consistent with our view of ongoing weakness in these segments of the economy. July’s retail sales came in at a 5.3% decline year-over-year, worse than the 5.0% expected by the market. The unemployment rate carries on its upward trend, landing a tad above estimates (11.8% vs. the market’s 11.7%) for the quarter ended in August. On the other hand, delivered its fourth consecutive positive surprise in July ‘s reading; yet its positive contribution did not stop the the index from slipping to negative terrain. August’s industrial production, to be incorporated into October’s index, surprised to the downside and will contribute negatively next month. In spite of the industrial production’s negative result, we see this as a momentary dip among a rising trend in the months ahead, in line with the inventory adjustment cycle.

Mexico’s index registered 0.03 in September, down from 0.23 in August. The country recurrently leads the group, but presented more negative surprises in September relative to previous months. We observe that growth continues to be led by the robust expansion of services, while industrial activity is subdued. On the negative side, industrial production contracted by 1.0% year-over-year in July, undershooting market expectations (-0.2%), yet looking beyond calendar effects we note that industrial production actually improved a bit. We expect industrial production to strengthen in the coming months on the back of gradually firmer manufacturing. Both consumer confidence and year-over-year investment also delivered negative surprises. On the positive side, retail sales expanded a tad more than estimates (7.9% vs. the market’s 7.8%), but a moderation of private consumption is likely, as inflation rises somewhat from the current levels. Looking ahead, the growth breakdown will likely change, with more balanced contributions between services and manufacturing.

Chile’s index registered -0.05, improving from August’s -0.34. The unemployment rate came in at 6.9% in the quarter ending in August, below market expectations (7.3%). The labor market continued to loosen, despite the unemployment rate surprising to the downside. We expect the labor market to continue loosening during the remainder of the year. Manufacturing increased 2.4% year-over-year, above estimates (0.5%), but the recovery in industrial production is likely temporary, in our view. Retail sales’ negative contribution, along with previous months’ effect on the moving average put downward pressure on the index. Retail sales grew a modest 0.2% year-over-year in August, well below market estimates, at 2.4%. High frequency activity indicators confirm that Chilean activity is not recovering.

Colombia’s index hit -0.84., marking a sharp drop from -0.23 in August and its second to worst result in the series’ history. Manufacturing had its largest annual decline since March 2013, while retail sales continued to weaken as credit conditions tighten and the persistently high inflation erodes real wages. Manufacturing contracted 6.2% year-over-year in July, well below market forecasts at 3.2%. Retail sales dropped 3.3% year over year in July, below the -0.3% forecasted by market consensus. Activity is showing clear signs of adjusting to the recent terms-of-trade shock, even when we account for calendar effects. Tighter fiscal and monetary policies, less oil-related investment and lower real wages are contributing to the slowdown.

Peru’s index recorded -0.06 in September, up from -0.24 in August. Peru’s monthly GDP grew 3.8% year-over-year in July – below market expectations (4.0%) – but this still marks a good beginning for Q3, after the economy expanded 3.7% in 2Q16. The story remains unchanged: natural resource sectors – led by mining – are growing at a strong pace, while non-natural resource activity is struggling to pick-up. August’s unemployment rate came in at 6.8% - below the market consensus (7%). Overall, we view July’s GDP growth as consistent with our outlook for the rest of 2016; that is, growth rates between 3.5% -4%.

Find our surprise indexes on Bloomberg:


Brazil: ITMRBI

Mexico: ITMRMI


Colombia: ITMRCOLI


Find our surprise indexes on Broadcast:


Brazil: ITSBR

Mexico: ITSMX

Chile: ITSCH

Colombia: ITSCO


Methodology Note

Our Itaú Surprise Index LatAm compares trends in economic activity indicators to what analysts had been expecting for them each month. The index considers the month that each indicator is released. Previously, the index was built considering the month that each indicator referred to. For instance, February’s industrial production released on March will be incorporated to March’s surprise index (before: February’s index).

The index is a GDP-weighted average of separate indexes for Brazil, Mexico, Chile, Colombia and Peru. An above-zero reading means good surprises. Below zero means disappointment. The index is a three-month average in order to avoid excess volatility.

We build the surprise index for each country using all activity indicators for which consensus estimates are normally provided in the Bloomberg survey. The weight of each indicator in the index depends on its importance for the economy. For example, GDP numbers enjoy a higher weight than consumer confidence and PMIs.

We use the deviation of the actual print from the consensus estimate (surprise), subtract the result from the historical average deviation and then divide the result by the standard deviation of the surprise. This methodology provides a better sense of how important was the surprise in each month.

The weight of each country in the aggregated LatAm Surprise Index depends on the size of its GDP. Brazil has the highest weight, followed by Mexico.

It’s worth noting that, due to revisions in the economic indicators and as lagged results are published (example: GDP), the surprise indexes may be revised.

Indicators on which the index is built:

Brazil: Caged Payrolls, Unemployment Rate, Exports, Imports, Retail Sales, Industrial Production, GDP, IBC-Br monthly GDP.

Mexico: Manufacturing PMI, Service PMI, Consumer Confidence, Investment, Industrial Production, Retail Sales, IGAE monthly GDP.

Chile: Manufacturing Production, Retail Sales, Unemployment Rate, Imacec monthly GDP.

Colombia: GDP, Industrial Production, Retail Sales, Unemployment Rate.

Peru: Monthly GDP, Unemployment Rate.


Luka Barbosa
Lourenço Paiva


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