Itaú BBA - Recovery continues, inflationary pressures contained

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Recovery continues, inflationary pressures contained

January 2, 2018

Most sectors have plans to increase CAPEX, but investments have been more concentrated on purchases of machinery and equipment.

With information through January 2, 2017

This 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
Activity recovery continues to spread among sectors. In our conversations with clients, the automotive sector is the main highlight, but we have also seen positive reports in the textile, airlines and steel sectors.

Investment
Most sectors have plans to increase CAPEX compared to 2017, but investments have been more concentrated on purchases of machinery and equipment than on construction. In addition, we note that concerns about the political landscape have been affecting business plans, leading companies to focus investments on efficiency and modernization, rather than capacity-building projects.

Labor Market, Production Costs and Prices
The unemployment rate at high levels and low inflationary inertia are factors that allow lower wage readjustments. Several sectors are already changing their structures in order to comply with the new labor law, but others are awaiting greater legal clarity before implementing actions consistent with the new legislation.

Our View
We forecast GDP growth to accelerate from 1.0% in 2017 to 3.0% in 2018, mainly due to monetary policy stimulus and recent advances in the capital market. However, there are downside risks to the  recovery in case of change in the perspective of fiscal adjustment. 



Consumption and Production of Goods and Services

Economic activity remains on a recovery trend, according to reports from most economic sectors.

Auto sales have been surprising on the positive side in recent months. Automakers are increasing work hours and starting shifts on Saturdays. The supply chain also reports similar conditions. The indication in our conversations is a 10-20% growth in sales in 2018. In addition to the current economic recovery, another factor stimulating sales is the renovation by households of the fleet of cars purchased in 2010/11 (last strong sales cycle). As for acquisition financing, among households delinquency is falling and the current level is already deemed compatible with a continued expansion of credit. Among companies, the cost of financing heavy vehicles in the non-earmarked credit market is currently close to the cost of the BNDES Finame program.

The textile sector has been reporting a robust increase in demand since the beginning of the second half of 2017. Sales slowed down in October and early November, but the "Black Friday" event was reported as positive for the industry. On the retail side, clothing-related companies recorded positive third-quarter growth for the first time in a few years.

Steelmakers point out that the recovery of the industry, first seen in the automotive sector, is spreading to other sectors, such as furniture and household appliances, white goods and capital goods for agriculture. Suppliers of forklifts and materials for the industry indicate strong sales growth in 2017 compared to 2016, but at levels still significantly lower than those observed in the pre-recession period.

In the airlines segment, there are reports that Brazilian families are planning their holidays in advance (for July 2018, for example), something that has not occurred in recent years. In the corporate segment, demand is recovering for domestic and international flights, but remains more sensitive to prices than in years of good economic conditions.

On the negative side, the telecom sector has not yet observed a rebound in prepaid lines recharging, something that usually happens quickly upon improvement in households' purchasing power.

Investment

Most sectors have plans to expand CAPEX (investment in capital goods) in relation to 2017. Investments have been more concentrated on machinery and equipment purchases than on construction, especially in the case of the real estate sector, which continues to face extra difficulties due to excess supply in recent years. However, there are signs of recovery even in this segment, with reports that construction of residential buildings began to recover in October.

We note that concerns about the political scenario, more precisely doubts about the continuity of the reform agenda, have affected investment decisions, leading companies to focus on specific investments in efficiency and modernization for the time being, and continue to postpone larger investments, such as expansion of installed capacity.

Labor Market, Production Costs and Prices

The unemployment rate at high levels and low inflationary inertia are factors that allow lower wage readjustments. Most sectors, even those with strong union participation, are completing the negotiation process with nominal wage increases between 1.5% and 3.0%, following readjustments close to 10% in previous years.

As for the impact of the labor reform, several sectors are already changing their structures in order to conform to the new law, while others await greater legal clarity before implementing actions compatible with the new legislation. The sectors that are already changing their structures reinforce that several aspects of the reform, among them its central axis, according to which the negotiated terms prevail over the legislated, will likely contribute to a significant reduction in the number of labor proceedings in the country. The new law is expected to translate into greater labor market flexibility and increased demand for employment, with some sectors reporting that the reform increases the attractiveness of the labor factor relative to capital.


 



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