Itaú BBA - Itaú Activity Surprise Index - Positive surprises, but slow recovery

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Itaú Activity Surprise Index - Positive surprises, but slow recovery

February 2, 2017

The reality suggests that activity in the region is picking up, but that a recovery will be slower than expected.

Our Itaú Activity Surprise Index improved in the first month of the year, climbing to 0.14, from 0.09 in December. The only clear outperformer was Mexico, but its outlook remains unfavorable. While improvement was seen in Brazil, positive surprises were relatively concentrated and due to one-off factors, and data points to a weak final quarter in 2016, as is the case of Colombia and Chile. The reality suggests that activity in the region is picking up, but that a recovery will be slower than expected.

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 0.15 in January, improving from December’s 0.06. The positive surprise from retail sales (due to one-off factors) and lower than expected job destruction kept the index aloft. Specifically, retail sales in November fell 3.5% year-over-year, much better than the 5.3% drop the market was expecting. The positive surprise, however, was driven by an anticipation in year-end purchases (Black Friday), which has not yet been fully captured in the seasonal adjustment. Preliminary indicators for sales in December suggest a payback which may offset this improvement, a pattern observed in the past two years. In the industrial sector, production showed weakness in November (falling 1.1% year-over-year vs. the market’s +0.1% estimate). This worsened the statistical inheritance for 2017’s GDP, which led us to revise our 2017 GDP forecast downwards to 1.0% from, 1.5%. However, industrial indicators are reacting positively on the margin, with a 2.3% rise in industrial output in December (to be discussed in the next report) and a 5.1% boost in industrial business confidence in January. As such, a recovery in industrial production going forward is still our baseline scenario.

Mexico’s index improved to 0.40 in January, from 0.20 in December, sustaining robust results. Positive surprises were spread out across the sectors of the economy. Industrial production expanded 1.3% year-over-year in November – above market expectations (at 0.5%). Retail sales and consumer confidence posted gains above expectations. Activity in 4Q16 was solid, unlike the rest of its Latin American peers. However, the prospects for 2017 have deteriorated, considering that higher inflation, tighter macro policies, and uncertainty surrounding trade relations with the U.S. will weigh on aggregate demand. We expect growth of 1.6% in 2017 (from the projected 2.1% growth in 2016).

Chile’s index deteriorated to -0.58 from December’s -0.13, on increasingly disappointing activity. The Imacec released in January on November activity came well below expectations, rising 0.8% year-over-year, while the market expected a 1.5% increase, being the main pushdown on Chile’s index. Activity data once again came in mixed in December, with downside surprises from consumption and positive ones from manufacturing. Specifically, retail sales increased 4.1% year-over-year, below the market’s 5.8% estimate, and manufacturing contracted 0.3%, better than consensus’ expectations (-1.2%). Overall, activity has been low and disappointing, but we expect a GDP recovery this year to 2.0% (from 1.5% expected for 2016), as average copper prices improve, inflation declines and interest rates fall.

Colombia’s index marked -0.03, down fromDecember’s 0.11. Monthly performance (and surprises) has been undergoing some volatility, hence the relatively neutral result captured in January. Manufacturing activity expanded 1.7% year-over-year, below expectations at 2.2%. Retail sales increased 4.9% year-over-year, considerably above the 0.5% the market had been expecting. Consumption was boosted by durable goods (mainly car sales), surprising in the context of a loosening labor market and high real interest rates. In spite of high monthly volatility, the trend of activity remains unfavorable. We expect GDP to have increased 1.8% last year, from 3.1% in 2015, as the slowdown following the terms-of-trade deterioration consolidates. We expect growth to accelerate to 2.3% in 2017.

Peru’s index deteriorated to -0.45 in January, from -0.08 in December. The GDP proxy expanded 3.2% year-over-year in November – below market expectations (3.5%). GDP growth was unbalanced in November, with strong natural resource activity (as has been the trend) and weak non-natural sectors (which reflects poor domestic demand).The weak growth of non-natural resource sectors is also reflected in softer labor market conditions – unemployment in December surged to 6.2%, surpassing the 5.7% expected by the market. Looking ahead, nevertheless, we expect Peru’s unemployment rate fall in in 2017, as growth becomes more balanced. Given the upward surprise in activity in November, we now estimate that GDP growth was 3.9% in 2016 (our previous forecast was 3.8%). For 2017, we expect GDP growth at 3.8%.

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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