Itaú BBA - We forecast a 0.8% decline in Brazilian 1Q16 GDP

Macro Vision

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We forecast a 0.8% decline in Brazilian 1Q16 GDP

mayo 25, 2016

Going forward, leading indicators suggest a relative stabilization, starting in the second half of the year.

We estimate a contraction in Brazilian economic activity in the 1Q16. On the supply side, industry and services will likely post further declines, extending their negative sequences. On the demand side, investment will probably decrease for the eleventh consecutive quarter. Already released data suggest another retreat in the second quarter of this year. Going forward, leading indicators suggest a relative stabilization, starting in the second half of the year.

Widespread supply contraction

Based on Itaú Unibanco monthly GDP and other economic activity indicators, we forecast a 0.8% decrease in Brazilian GDP in the 1Q16, qoq/sa. Year-over-year, the contraction will reach 6.1%. The official data from the Quarterly National Accounts will be released on June 1.

On the supply side, we expect an 1.9% qoq/sa drop for the industry's GDP. This estimate is consistent with data from the Monthly Industrial Survey (PIM-IBGE), which showed a 2.1% contraction in manufacturing output and a 6.5% decrease in mining and oil production. We expect a 0.9% slide in construction and, on the positive side, a 2.0% increase in the industrial utilities segment.

For the service sector, we forecast the fifth consecutive decline. If confirmed, this will be the longest negative sequence since the beginning of the series. We highlight the drop in trade (-1.5%), transportation (-0.8%) and real estate and rental activities (-0.5%). On the positive side, we estimate a 0.6% increase in public administration services. In addition, we estimate a 2.5% drop in agricultural and livestock production, following a 2.9% increase in the previous quarter. A smaller corn crop contributed to the result (-5.5% over 2015).

From the demand standpoint, we anticipate the eleventh consecutive contraction in gross fixed capital formation (-6.1%). Household consumption will probably recede by 1.0%, consistent with the 1.9% contraction in broad retail sales, according to the Monthly Retail Survey (PMC-IBGE). We expect a rise in government consumption, however not offsetting the contraction observed in 4Q15. The external sector will likely contribute positively (about 1.7 pp qoq/sa). The contribution would come from a drop in imports (-6.1%) and increase in exports (6.0%), both estimates based on Funcex quantum data.

Relative stability starting in the second half

For the second quarter, data point to further decline in economic activity. We forecast a drop in industrial production and broad retail sales in April. Additionally, preliminary numbers suggest a 0.7% decrease for Itaú Unibanco monthly GDP in April. For 2Q16, this would imply a statistical carry-over of -0.6% for our proxy of economic activity.

Going forward, our diffusion index – which shows the number of indicators with positive variations, based on a broad set of data, including business and consumer confidence, retail sales and demand for credit – shows some recovery in recent months and suggests a relative stability of economic activity, starting in the second half.

In the industry sector, inventories continue to decline, suggesting that production level is below industrial demand. In addition, interest rate cuts expected for the second half will also likely contribute to an increase in demand.

On the negative side, the labor market deterioration will probably continue, as it reacts with lags to economic activity. Thus, household consumption will likely continue to contract over the coming months.

All in all, we expect a GDP decline in 1Q16. Coincident and leading indicators suggest some stability starting in the second half of this year. We forecast a 4.0% drop in 2016 GDP.


Rodrigo Miyamoto


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