Itaú BBA - We forecast a 0.6% contraction in Brazilian 2Q16 GDP

Macro Vision

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We forecast a 0.6% contraction in Brazilian 2Q16 GDP

August 24, 2016

We expect investment growth in 2Q16

We estimate the sixth consecutive GDP decline in 2Q16. On the supply side, we forecast the fifth consecutive drop in services and an interruption in the contractions sequence in industry. On the demand side, we forecast the sixth decline in household consumption. On the positive side, investment will likely grow after having declined for ten quarters. For the second half of the year, we forecast GDP stabilization, although leading indicators point to stronger economic activity compared to our scenario.

We expect investment growth in 2Q16

Based on Itaú Unibanco monthly GDP and other economic activity indicators, we forecast a 0.6% decrease in Brazilian GDP in 2Q16, qoq/sa. With this result, we expect a 1Q16 revision to -0.4% from -0.3%. Year-over-year, the contraction will stand at 3.8%. Quarterly National Accounts data will be released on August 31.

On the supply side, we expect a 0.8% qoq/sa drop in services GDP. If confirmed, this will be the  fifth consecutive contraction, the longest negative sequence since the beginning of the series. We highlight the decline in transportation (-2.3%) and other services (-1.7%). On the positive side, we expect a 0.9% increase in information services and 0.2% in trade. The industry will resume growth (1.6%) after five quarters of decline. This estimate is consistent with data from the Monthly Industrial Survey (PIM - IBGE), which showed expansion rates of 1.3% in the manufacturing industry and 2.3% in the mining and oil production. We expect a slight contraction in construction (-0 3%) and a 6.1% increase in industrial utilities segment. Additionally, we estimate a 1.0% drop in agricultural and livestock production. The smaller corn crop contributed to this result (-20% yoy).

From the demand standpoint, we anticipate the sixth contraction in household consumption (-0.7%), consistent with a contraction of 2.2% in broad retail sales, according to data from the Monthly Retail Survey (PMC - IBGE). We forecast lower government consumption (-0.4%) and the first increase in gross fixed capital formation in eleven quarters (1.5%). The external sector will likely contribute negatively (about -0.4 pp, considering the quarter-over-quarter variation). The contribution would come from a lower rise in exports (0.6%) than in imports (3.1%), both estimates based on Funcex quantum data.

Leading indicators suggest economic activity in positive territory in the second half

In July, there was a widespread increase in business and consumer confidence. In addition, our diffusion index - which shows the number of indicators with positive variations, based on a broad set of data, including business and consumer confidence, retail sales and demand for credit – will likely end June at about 54% (three-month moving average), above the neutral level (44%). With limited data for July, the expected diffusion for the month is 60%, comparable to 2010. As a leading indicator of GDP, the result suggests a positive bias to the end of this year.

Although leading indicators are already reflected in the industry, which is showing more signs of consistent improvement, service sector revenues and retail sales are still declining. Additionally, uncertainty still shrouds the reforms and adjustments needed for a return to growth. As the latter move ahead, we will incorporate the positive bias suggested by leading and contemporary high frequency indicators into our scenario.

In conclusion, we expect a GDP decline in 2Q16. Going forward, leading indicators suggest stronger economic activity than we currently forecast in our scenario for 2H16, adding an upward bias to our GDP forecasts (we currently forecast -3.5% in 2016 and 1.0% in 2017).


Rodrigo Miyamoto


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