Itaú BBA - GDP expands 0.8% in 3Q18

Brazil Review

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GDP expands 0.8% in 3Q18

diciembre 3, 2018

Confidence indexes improved significantly, while previous months’ available activity data continue to show a slow recovery pace

The Brazilian economy in November 2018

GDP increased 0.8% in 3Q18. Activity indicators declined in September and unemployment remained stable in October, while confidence indicators advanced in November. Inflation remains low. In the political front, new ministries and the economic team are taking shape.

GDP climbs 0.8% in 3Q18

Brazilian GDP expanded 0.8% qoq/sa in 3Q18, in line with market expectations. The result was distorted by base effects caused by the truckers’ stoppage in 2Q18. On a year-over-year basis, GDP advanced 1.3%, printing below estimates, mainly because the Census Bureau IBGE revised the quarterly series since 2016. From a demand standpoint, fixed capital investment climbed 6.6% qoq/sa and 7.8% yoy. This performance was largely driven by the incorporation of goods for the oil & gas industry due to changes in the REPETRO customs tax break regime (which also distorted imports numbers). Without this accounting effect, we estimate that the quarterly increase would be just 1.0%. Household spending rose 0.6% qoq and 1.4% yoy. Consumer expenses in 3Q18 were possibly boosted by withdrawals from PIS/PASEP (employer contribution) accounts, which took place primarily in August. We expect GDP to grow 1.3% in 2018, 2.5% in 2019 and 3.0% in 2020, assuming expansive financial conditions and progress in government reforms.

Activity indicators declined in September

Industrial production fell 1.8% mom/sa in September, worse than market expectations. Widespread weakness among activities and economic categories reflected tighter financial conditions in 3Q18. The two components that are more closely related to capital investments point to stagnation: production of capital goods declined, while production of construction material rose just 1.0% (not offsetting the 2.8% drop registered earlier in the quarter).

Following the same trend, core retail sales fell 1.3% mom/sa in September, giving back the previous month’s gain and disappointing the median of market expectations (stability) and our estimate (-0.6%). After a month boosted by withdrawals from accounts held under PIS/PASEP programs (social contributions by employers), a normalization was probably behind the reversal. Broad retail sales (including vehicles and construction material) dropped 1.5%. Real revenues from services also receded in September, by 0.3%, while rising 0.5% yoy. 

Based on such results, Itaú Unibanco’s monthly GDP fell 1.2% mom/sa in September, while advancing 1.0% yoy. Diffusion showed that the picture was not as poor as the headline reading suggested. Nine out of 13 monthly GDP components retreated on a seasonally-adjusted monthly basis in September, dragged by manufacturing (-2.4%) and retail (-1.2%). On the opposite end, construction stood out with a hike of 1.3%. In that same beat, the Central Bank’s economic activity index (IBC-Br) slid 0.1% mom/sa in September, but stayed above market expectations (-0.2%). Year-over-year, the indicator rose 0.7%.

Unemployment remains virtually stable in October

According to the national household survey (PNAD Contínua - IBGE), Brazil’s nation-wide unemployment rate receded to 11.7% in the quarter ended in October, from 11.9% in the quarter ended in September. Using our seasonal adjustment, unemployment remained virtually stable at 12.1%, as gains in informal employment offset a higher participation rate and a decline in formal employment. The real wage bill expanded 0.7% qoq/sa, driven by higher occupation rates, while real wages remained virtually stable.

According to the Ministry of Labor’s CAGED registry, a net 57.7k formal jobs were created in October, missing market expectations (65k). Seasonally-adjusted figures point to 51k new jobs during the month. The three-month moving average advanced to 59k from 50k, a faster pace than in late 2017. Hiring as well as layoffs are slightly higher than in that period. Breaking down by sectors, services stood out with a gain of 34k jobs, while manufacturing posted a drop of 8k jobs, seasonally adjusted.

Confidence indicators advance in November

Confidence indicators published by FGV showed positive results in November. Consumer confidence rose 8.2%, boosted by the expectations subcomponent (10.1%) as well as the item addressing current conditions. Confidence in the construction sector climbed for a third consecutive month, by 3.5%. In the same direction, confidence among retail entrepreneurs soared 7.5% and reached the highest level since March 2014. Confidence in the service sector advanced 5.8%. In the industrial sector, confidence went up slightly by 0.2 p.p. and interrupted a string of declines that had been occurring since May. 

Inflation remains low

The consumer price index IPCA climbed 0.45% in October and the year-over-year change accelerated to 4.56% from 4.53% in September. The mid-month IPCA-15 rose 0.19% in November, printing below the median of market expectations (0.24%). The index went up 0.58% in October and 0.32% in November 2017. Year-to-date inflation reached 4.03%, while the year-over-year change slowed to 4.39% from 4.53% in the previous month. Food and beverages (0.13 p.p.) provided the largest upward contribution during the month, followed by transportation (0.06 p.p.) and personal expenses (0.04 p.p.). On the other hand, healthcare and personal care (-0.04 p.p.), and housing (-0.02 p.p.) provided negative contributions. Our preliminary forecast for the headline IPCA in November is a drop of 0.05%, pushing the year-over-year rate down to 4.2%. For the full year, our estimate for the IPCA is 3.9%. 

Public sector posts a surplus in October

The consolidated public sector posted a primary surplus of 7.8 billion reais in October, close to our expectation (8.5 billion) and market consensus (8.1 billion). The central government had a 9.5 billion reais surplus and beat our call (6.3 billion), while regional governments had a deficit of 3.1 billion reais and state-owned companies had a surplus of 0.7 billion reais (we anticipated a surplus of 0.3 billion and a deficit of 0.3 billion, respectively). The consolidated primary deficit accumulated over 12 months narrowed to 1.2% of GDP in October from 1.3% in September. The latest monthly reading confirms the outlook for a better primary result than the target set for the deficit in 2018.

The public sector’s net debt increased to 53.3% of GDP in October from 52.2% in September, while the general government’s gross debt slid to 76.5% from 77.2%. A favorable fiscal scenario depends strictly on the approval of reforms (such as the pension reform) that would signal a gradual return to primary surpluses that are compatible with structural stabilization of public debt.

New ministries and the economic team are taking shape

Economist Roberto Campos Neto was appointed Central Bank Governor in the next administration, after Ilan Goldfajn cited personal reasons to decline the offer to remain in the post. Current Central Bank directors made themselves available to the nominee to remain at the Bank. Economic Policy Director Carlos Viana de Carvalho has already agreed to stay for a considerable period. The National Treasury will remain under the leadership of current Secretary Mansueto de Almeida. Former Minister Joaquim Levy will come back to the government as head of development bank BNDES. The next administration also named new presidents for Caixa (Rubem Novaes), Banco do Brasil (Pedro Guimarães) and Petrobras (Roberto Castello Branco) – all of them with a strong market/economic background.

As for ministries, the President elect has so far chosen 20 and more announcements are expected over the coming weeks. Led by Paulo Guedes, the Ministry of Economics will likely be formed by six secretariats, among which the Destatization and Demobilization Secretariat stands out as the main innovation, to be led by Salim Mattar.

Financial assets

In November, the Ibovespa climbed 2.4% in local currency and receded 1.5% in dollars. Country risk measured by the CDS increased 6 bps and ended the month at 210 bps. The exchange rate depreciated to 3.86 reais per dollar.

What’s next

On December 12, the Central Bank’s Monetary Policy Committee (Copom) will announce the last decision scheduled for the year. Discussions about the possibility of approving reforms, including the pension reform, will be closely monitored. The full composition of the new economic team and new ministries will also be in the spotlight.

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