Itaú BBA - Declining Confidence, Slower GDP

Brazil Review

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Declining Confidence, Slower GDP

junio 2, 2014

We revised our forecast for GDP growth this year to 1.0%

The Brazilian economy in May 2014

We revised our forecast for GDP growth this year to 1.0%, as the economy loses steam and business and consumer confidence levels decline. Despite slower job creation, the labor market remains tight. Inflation remains close to the upper limit of the target range and the Brazilian Central Bank maintained the benchmark interest rate at 11.0% in its last meeting. The current-account deficit was wider than expected, but direct investment remained strong. The public sector’s primary budget surplus increased, due to postponed expenditures and extraordinary revenues. Brazilian assets ended the month at relatively stable levels. A match between Brazil and Croatia will kick off the Soccer World Cup on June 12.

We revised our forecast for GDP growth this year to 1.0%, as the economy loses steam...

In 1Q14, GDP expanded 0.2% from the previous quarter, slightly below our call (0.3%). An increase of 3.6% in the service sector and a decline of 0.8% in industrial production stood out. Brazilian GDP grew 2.5% over four quarters. Based on the GDP report and the deterioration in recent activity indicators (particularly confidence levels, discussed below), we reduced our forecast for GDP growth this year to 1.0% from 1.4%. Figures by census bureau IBGE also showed a slight upward revision in 2013 GDP growth to 2.5% from 2.3%.

...and business and consumer confidence levels decline.

In May, business confidence measured by FGV fell sharply in both the industrial sector (-5.1%) and the service sector (-5.7%), reaching the lowest levels since 2009. Meanwhile, consumer confidence dropped 3.3% in May, also to the lowest level since 2009.

Despite slower job creation, the labor market remains tight.

In April, 105K government-registered jobs were created, meaning a net elimination of 32K positions in seasonally-adjusted terms. Breaking down by sector, the industrial sector stood out negatively, eliminating 3K jobs during the month. Yet, the unemployment rate measured by IBGE receded to 4.9% in April (4.6% in the seasonally-adjusted series), the lowest since 2003, because the labor force is shrinking. The tight labor market continues to pressure wages, but the real-wage bill grows modestly, due to slow growth in the working population.

Inflation remains close to the upper limit of the target range...

The mid-month consumer price index IPCA-15 climbed 0.58% in May, in line with our estimate and market expectations. Year over year, the change picked up to 6.31% from 6.19% in April, approaching the upper limit of the central bank’s target range (6.5%). The slowdown in monthly terms was driven by lower readings in the food and transportation groups.

...and the central bank maintained the benchmark interest rate at 11.0% in its last meeting.

The Brazilian Central Bank’s Monetary Policy Committee (Copom) maintained the benchmark Selic interest rate at 11.00% p.a. The post-meeting statement included the expression “at this moment,” which, in our view, leaves the door open for new interest-rate increases in the future. We believe that the outlook for weaker economic activity was behind the committee’s decision to interrupt the interest-rate hiking cycle. Exchange-rate appreciation in recent months and signs that inflation is no longer increasing (although it still remains at high levels) probably contributed to the decision as well. If it is necessary, the Copom may implement additional interest-rate increases to ensure a stable inflation outlook. We expect that to happen only in the beginning of next year. We thus maintain our forecast, held since last February, that the Selic rate will remain at 11% p.a. until year-end, and be increased again in 2015, up to 12.50% p.a.

The current-account deficit was wider than expected, but direct investment remained strong.

April ended with a wider-than-expected current-account deficit of $8.3 billion. The biggest surprise came from the income account, with hefty profit and dividend remittances. Over 12 months, the gap was virtually stable at $81.6 billion (3.65% of GDP). We regard the latest move as isolated and unlikely to be repeated in the next months. Foreign direct investment adds up to $64.5 billion (2.88% of GDP) over 12 months.

The public sector’s primary budget surplus increased, due to postponed expenditures and extraordinary revenues.

The primary surplus reached 16.9 billion reais in April, slightly higher than our forecast. Central government spending slowed down, but because outlays were postponed. Hence, the surplus over 12 months increased to 1.87% of GDP from 1.75% in March. We continue to expect a retreat in the surplus to 1.3% of GDP by year-end, below the government’s target of 1.9% of GDP.

A poll by Ibope showed a recovery for Rousseff and advances in voter intentions for Neves and Campos.

According to Ibope, President Rousseff had 40% of voter intentions in May, up from 37% in the previous month. Voter intentions for Aécio Neves and Eduardo Campos increased to 20% and 11%, respectively. The share of blank and null votes receded to 14% from 24%, indicating that indecisiveness among Brazilian voters is receding gradually. The survey also showed that approval ratings for the Rousseff administration (percentage of participants who regard the administration as “good” or “excellent”) rose slightly, to 35% from 34%.

Brazilian assets ended the month at relatively stable levels.

The Brazilian real finished May at 2.239, up by only 0.1% from the end of April. The Ibovespa stock market index decreased 0.8% in local currency and 0.9% in U.S. dollars. The 5-year Brazilian CDS fell 4 bps to 142 bps.

What’s next?

The Soccer World Cup starts on June 12 with a match between Brazil and Croatia in São Paulo. With 31 national teams playing, the tournament ends on July 13. When it comes to the economy, all eyes will be on growth indicators, due to the recent weakening in activity.



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