Itaú BBA - Higher domestic uncertainty hinders economic recovery

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Higher domestic uncertainty hinders economic recovery

July 17, 2018

In a quarter marked by one-off events, there is a perception that the recovery has lost steam from May onwards.

With information through July 17, 2018

This quarterly report summarizes anecdotal information on current economic conditions received from key business contacts, economists, market experts, and other sources outside Itaú. Apart from the “our view” section, it is not a commentary on the views of Itaú’s Macroeconomic Research team.

Contents:

Consumption and production of goods and services
In a quarter marked by one-off events – the truckers' stoppage and the World Cup – there is a perception that April was a stronger month, but that the recovery has lost steam from May onwards.

Investment
Still-high spare capacity in most sectors, the recent depreciation of the BRL (which tends to increase corporate leverage) and uncertainties regarding the medium-term outlook seem to be limiting companies' propensity to make new investments.

Labor Market, Production costs and prices
The same uncertainty that inhibits investments also appears to be getting in the way of job creation.

Our View
We trimmed our GDP growth forecasts to 1.3% in 2018 and 2.0% in 2019 (from 1.7% and 2.5% in our last scenario) due to the high degree of uncertainty in the economy, which is reflected in a weak labor market, soft investment and persistent deterioration of financial conditions. 

 


Consumption and production of goods and services

After a first quarter of more widespread but still-gradual recovery, the overall impression is that April was a stronger month (at least in part, because it had more business days than usual). However, there is a perception that the recovery slowed down in May – a phenomenon that was intensified by the truckers’ stoppage at the end of the month. In June, we see ambiguous reports due to a combination of factors: some sectors still face lingering effects of the stoppage, while others see stronger activity as a payback from the shock. Several sectors report that working days were less busy than usual, due to the World Cup matches.

On the consumption side, we see a clear split between sectors whose sales depend on the availability of credit (mainly vehicle sales) and those whose main driver is current income. In the former, the lower interest rates and faster expansion of consumer loans continue to drive strong growth. On the other hand, the sectors more dependent on current income (such as supermarket sales) continue to show modest growth.

The truckers’ stoppage caused food and beverage sales to spike in the first days – due to anticipated consumption by households – followed by a sharp decline that resulted from shortage of some products. Other retailers did not face significant supply problems, because they had some comfort with inventory levels. Consumer traffic in stores and shopping centers was also greatly reduced during the stoppage and sales of vehicles and other durable goods were heavily affected in the period, probably due to the difficulty for people to move around. Most retailers report that an activity normalization started in the following weeks, but in some sectors sales were less robust in the second half of June and early July due to the World Cup. However, companies in these sectors report that sales have returned to a more normal pace after the Brazilian team lost in the quarterfinals. 

On the production side, the automotive industry continued to stand out in the second quarter, with continuous reduction of spare capacity – some automakers and suppliers already have little room to increase production. Agriculture also continues at a robust pace, boosting demand for related sectors.

The truckers’ stoppage forced the great majority of companies to make significant output cuts. Some factories even stopped production for a while, as in the pulp and paper sector. Some automakers have also come to a halt because some inputs were in shortage – and now they plan to increase production, trying to make up for the "lost" days. In steel and mining the effects of the shutdown were less intense, due to the use of rail transport in both sectors.

The definition of minimum truck freight prices has been a recurring point of concern for entrepreneurs, especially regarding the transport of goods with lower added value or over longer distances, such as shipping  cargo from the Southeast to the Northeast. Companies have been seeking, where possible, to explore other means of transportation, such as cabotage. In several industries, it is believed that a significant part of the cost increase will have to be passed along the chain.

Investment

Volatility has intensified and we have noted a significant increase in concerns about the domestic scenario and the medium-term outlook for the economy. This uncertainty seems to be limiting companies’ propensity to make new investments.

Spare capacity remains high in most sectors, reducing the need for investments in the short term. On top of that, the recent depreciation of the BRL tends to increase the leverage of companies that have dollar-denominated debt and pressure the prices of machinery and other capital goods, which are very often imported products.

Labor Market, production costs and prices

The same uncertainty that inhibits investments also appears to be getting in the way of job creation, according to reports by some companies.



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