Itaú BBA - We forecast a 0.6% decline in Brazilian 4Q16 GDP

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We forecast a 0.6% decline in Brazilian 4Q16 GDP

February 23, 2017

Fundamentals continue to suggest a recovery ahead

We anticipate the eighth consecutive GDP decline in 4Q16. From the supply standpoint, we expect the eighth straight drop in service activity. The industrial sector should also decline during the quarter. On the demand side, household spending probably fell for the eighth consecutive quarter. Furthermore, investments and exports also dropped, but spending by public administration and imports likely advanced. Hence, GDP probably shrank 3.5% in 2016. In our view, the economy will grow again in 1Q17.

Another drop in investments

Based on Itaú Unibanco monthly GDP and other activity indicators, we estimate a 0.6% qoq/sa slide in Brazilian GDP in the 4Q16, qoq/sa. Year-over-year, the contraction will reach 2.3%. If confirmed, GDP will shrink 3.5% vs. 2015. Quarterly National Accounts will be released on March 7. 

From the supply standpoint, we estimate a retreat of 0.6% qoq/sa in service GDP. If confirmed, this will be the eighth consecutive drop and mark the longest negative sequence since the beginning of the historical series. We emphasize expected declines in information services (-3.6%, after +0.5% in 3Q16), trade (-0.8%) and transportation (-1.3%).  Industrial activity probably shrank 0.8%. This estimate is consistent with data from the Monthly Industrial Survey (PIM – IBGE), which showed a 1.1% slide in manufacturing and a 2.0% increase in mining and extraction. Construction likely decreased (-2.3%), while industrial utilities services climbed 0.7%. Agricultural and livestock production probably increased 2.2%.

From the demand standpoint, household spending probably fell for the eighth consecutive quarter (-0.6%), consistent with the 0.9% drop in broad retail sales, according to the Monthly Retail Survey (PMC-IBGE). Gross fixed capital formation likely slid 2.9%. The external sector should contribute -0.3 p.p., as exports receded (-0.9%) and imports rose (1.2%), both estimates based on Funcex quantum data. Finally, government spending probably increased slightly (0.2%), after falling 0.3% in 3Q16.

Fundamentals continue to suggest a recovery ahead

Going forward, fundamentals (interest rates, commodity prices and confidence levels, in particular) remain stable. Furthermore, confidence levels in the main economic sectors advanced in recent months and are higher than in 1H16.

Industrial production increased at the margin in December, leaving a statistical carryover of 1.6% into 1Q17. We maintain our view that industrial demand is higher than output (as measured by capacity utilization). In that case, we see room for growth in industrial production when inventories reach desired levels, even if industrial demand remains stable.

All in all, we expect a 0.6% GDP decline in 4Q16 and 3.5% drop in 2016. Short-term data reflect improvement, with gains in confidence and industrial production, while fundamentals remain stable. This scenario suggests economic growth in 1Q17.


Rodrigo Miyamoto



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