Itaú BBA - Itaú Activity Surprise Index - Downside surprises in Mexico amid natural hazards

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Itaú Activity Surprise Index - Downside surprises in Mexico amid natural hazards

diciembre 4, 2017

The impact of the natural hazards (hurricanes and earthquakes) over activity, albeit temporary, was widespread.

Our Itaú Activity Surprise Index fell to -0.09 in November (0.03 in September), after 11 uninterrupted months in positive territory. The Mexican index dropped in the month, as the impact of the natural hazards (hurricanes and earthquakes) over activity, albeit temporary, was widespread across sectors. The Chilean component also declined materially, amid a slowdown of manufacturing activity. There were mixed surprises in Colombia, while Brazilian data releases in November came on the stronger side of expectations.

The Itaú Activity Surprise Index compares trends in economic activity indicators released during the month to what analysts had been expecting for them. It is a GDP-weighted average of separate indexes for Brazil, Mexico, Chile, Colombia and Peru. An above-zero reading means favorable surprises. Below zero means disappointment. The index is a three-month average in order to avoid excess volatility. Surprises in activity often trigger revisions in GDP growth estimates.

Brazil's index oscillated downwards to -0.01 in November (+0.10 in the previous month), after eight consecutive months in positive territory. However, the negative print is due to the moving average dynamics, as most of the indicators released in November came on the stronger side of market’s expectations. In fact, according to the labor ministry, 77 thousand formal jobs were created in October – well above market’s expectation of 15 thousand jobs. The unemployment rate for the quarter ending in October reached 12.2% - in line with the consensus. Once again, the informal sector (particularly self-employment) accounted for most of the decline in the unemployment rate. Moreover, core retail sales (excluding vehicles and construction material) expanded 6.4% year-over-year in Sep tember, surpassing the median of analysts’ forecasts (5.9%). The result suggests that retail sales resumed an upward trend after two softer months that probably reflected a reversal of the boost provided by withdrawals from inactive accounts held under employment protection program (FGTS). On the negative side, industrial production for the month of September grew 2.6% year-over-year (mkt: 3.1%). On the one hand, diffusion was weaker than the headline reading suggested; on the other, the bulk of the disappointment was due to a hefty decline in pharmaceutical production, whereas investment-related segments sustained a good performance. All in all, the economy is on a gradual recovery path.

Mexico's index dropped to -0.22 in November, coming from -0.04 in October. The retail sales monthly indicator fell 0.3% year-over-year in September, below median market expectations (0.8%, as per Bloomberg), which implied a nil growth rate in 3Q17. The weakness is explained by lower real wages (as inflation peaked), weaker remittances converted to MXN, a slowdown of consumer credit and the negative impact of the earthquakes. Overall, the impact of the natural hazards over activity, albeit temporary, was widespread across sectors (particularly detrimental for oil output and services activity). In fact, according to calendar-adjusted data reported by INEGI, GDP growth was also 1.5% year-over-year in 3Q17, marking a significant deceleration with respect to 2Q17 (3.1%, adjusted for the Easter h olidays). We expect GDP growth of 2.1% in 2017. Looking at the growth story, we note uncertainty is high, considering the Nafta-related debate and the presidential elections. However, we also believe there will be significant buffers for activity in coming quarters: the strength of the U.S. industry will likely boost manufacturing output, and falling inflation, coupled with robust employment, will stimulate consumption.

Chile's index fell to -0.26 in November, coming from -0.03 in the previous month. Manufacturing posted a mild 0.6% year-over-year growth in October, substantially below the Bloomberg market consensus (4.2%). Correcting for calendar effects, manufacturing rose 0.1%, marking a notable slowdown from the previous three months. The Imacec GDP-proxy likewise registered softer than expected growth in September (1.3% year-over-year vs. 1.6%). Meanwhile, the unemployment rate for the quarter ending in October printed at 6.7 pp, 0.1pp above median market expectations. The breakdown reaffirms a fragile labor market, amid soft salaried employment growth. Finally, GDP grew 2.2% year over year in 3Q17, in line with expectations. Durable consumption continued to be a firm driver of activity, while the dra g from net exports moderated on the back of a generalized improvement in Chile’s exports. Going forward, higher global growth (supporting copper prices) and expansionary monetary policy will aid an activity recovery. We forecast growth of 1.7% this year and 2.7% for 2018.

Colombia's index oscillated upwards to 0.02 in November, coming from -0.02 in the previous month. Data releases in November were mixed. Retail sales grew 1.4% year-over-year in September, above the Bloomberg market consensus of 1.0%. Overall retail activity improved in the 3Q17, but vehicle and fuel sales remain a drag. Conversely, industrial production disappointed in September, declining 1.9% year-over-year (mkt: -1.0%). In fact, the 3Q17 GDP data reveals that mining and construction (particularly the non-residential component) were the principal drags on 3Q17 activity, whereas agriculture continued to be an activity driver. In all, recovering real wage growth and stronger external demand will aid an activity rebound in the second half of the year and in 2018, but we acknowledge a downside risks to our 1.6% growth forecast fo r the ye ar.

Peru's index increased to -0.19 in November, from -0.23 in October. The monthly GDP-proxy grew 3.2% year-over-year in September, topping the 2.9% growth median projection (as per Bloomberg). According to data reported by the central bank, GDP growth accelerated to 2.5% year-over-year in 3Q17 (from 2.4% in 2Q17), with the highlight being the expansion of private investment ending a string of fourteen consecutive quarters of contraction. Looking ahead, we expect GDP growth to post 2.9% in 2017 and then pick-up to 4.2% in 2018. The drivers would be higher terms of trade (mainly metal prices), expansive macro policies (especially fiscal, but also monetary), and some rebound of infrastructure investment (paralyzed in 2017 because of corruption scandals).

Find our surprise indexes on Bloomberg:

LatAm: ITMRLAI

Brazil: ITMRBI

Mexico: ITMRMI

Chile: ITMRCHLI

Colombia: ITMRCOLI

Peru: ITMRPI

Find our surprise indexes on Broadcast:

LatAm: ITSLA

Brazil: ITSBR

Mexico: ITSMX

Chile: ITSCH

Colombia: ITSCO

Peru: ITSPR

Methodology Note

Our Itaú Surprise Index LatAm compares trends in economic activity indicators to what analysts had been expecting for them each month. The index considers the month that each indicator is released. Previously, the index was built considering the month that each indicator referred to. For instance, February’s industrial production released on March will be incorporated to March’s surprise index (before: February’s index).

The index is a GDP-weighted average of separate indexes for Brazil, Mexico, Chile, Colombia and Peru. An above-zero reading means good surprises. Below zero means disappointment. The index is a three-month average in order to avoid excess volatility.

We build the surprise index for each country using all activity indicators for which consensus estimates are normally provided in the Bloomberg survey. The weight of each indicator in the index depends on its importance for the economy. For example, GDP numbers enjoy a higher weight than consumer confidence and PMIs.

We use the deviation of the actual print from the consensus estimate (surprise), subtract the result from the historical average deviation and then divide the result by the standard deviation of the surprise. This methodology provides a better sense of how important was the surprise in each month.

The weight of each country in the aggregated LatAm Surprise Index depends on the size of its GDP. Brazil has the highest weight, followed by Mexico.

It’s worth noting that, due to revisions in the economic indicators and as lagged results are published (example: GDP), the surprise indexes may be revised.

Indicators on which the index is built:

Brazil: Caged Payrolls, Unemployment Rate, Exports, Imports, Retail Sales, Industrial Production, GDP, IBC-Br monthly GDP.

Mexico: Manufacturing PMI, Service PMI, Consumer Confidence, Investment, Industrial Production, Retail Sales, IGAE monthly GDP.

Chile: Manufacturing Production, Retail Sales, Unemployment Rate, Imacec monthly GDP.

Colombia: GDP, Industrial Production, Retail Sales, Unemployment Rate.

Peru: Monthly GDP, Unemployment Rate.

 

Luka Barbosa
Eduardo Marza



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