Itaú BBA - We forecast a 1.1% decline in Brazilian 3Q16 GDP

Macro Vision

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We forecast a 1.1% decline in Brazilian 3Q16 GDP

noviembre 22, 2016

Investment probably declined again

We estimate the seventh consecutive GDP contraction in 3Q16. From the supply standpoint, services activity is expected to shrink for the seventh consecutive quarter, while industrial GDP is set to retract after growing in 2Q16. From the demand standpoint, we forecast the seventh drop in household spending. Investment will likely decline after an increase in the previous quarter. Importantly, the 3Q16 GDP report comes with additional uncertainty, due to the revision in the historical series. At the margin, data suggests economic activity levels below expectations. Hence, we see downside risks to our 2016 GDP forecast (currently at -3.2%).

Investment probably declined again

Based on Itaú Unibanco’s monthly GDP and other economic activity indicators, we expect a 1.1% drop in national GDP in 3Q16, qoq/sa. Year-over-year, the decline will stand at 3.4%. Quarterly National Accounts will be published on November 30. This release carries additional uncertainty due to the revision in the historical series, which will incorporate data from structural surveys and conjunctural indicators.

From a supply standpoint, we see services GDP falling 0.8% qoq/sa. If confirmed, this would be the seventh consecutive decline in the segment, the longest negative sequence since the beginning of the series. We anticipate noteworthy drops in transportation (-1.7%), trade (-1.5%) and other services (-0.8%). Near stability is expected for financial institutions (-0.1%), real estate rentals (-0.1%) and public administration services (0.0%). On the positive side, we estimate that information services will expand 0.9%. Industrial activity will likely decline again (-0.9%), after a 0.3% hike in the previous quarter. This call is consistent with the data in the Monthly Industrial Survey (PIM – IBGE), which showed a 1.2% slide in manufacturing and a gain of 1.6% in extraction and mining. We forecast a decline in construction (-1.0%), and a 2.3% increase in industrial utility services. According to our estimates, agricultural and livestock output fell 3.6%, dragged by a smaller corn crop (-25% vs. 2015).

From the demand standpoint, we forecast the seventh drop in household spending (-1.0%), consistent with a 2.7% slide in broad retail sales, according to data in the Monthly Retail Survey (PMC-IBGE). Gross fixed capital formation probably retreated 3.3%, after having interrupted a sequence of ten consecutive drops in 2Q16. The external sector will provide zero contribution, due to declines in both exports (-2.8%) and imports (-2.7%), both estimates based on Funcex quantum data. Finally, government consumption probably increased slightly (0.3%).

Fundamentals continue pointing to a rebound ahead

Despite disappointing data at the margin, fundamentals (interest rates, commodity prices and confidence indicators, in particular) remain unchanged. Confidence levels in the main economic sectors remain higher than in 1H16, although they showed signs of moderation in October.

In the industrial segment, falling inventories has boosted confidence in recent months. The move does not necessarily mean an immediate gain in production, as seen in recent months. On the other hand, the reduction in inventories reinforces our understanding that the current level of demand is higher than production (as measured by capacity utilization). In that case, we still see room for growth in industrial output when inventories reach desired levels, even if industrial demand remains stable.

All in all, we expect GDP to decline in 3Q16 and see downside risks to our forecast for 2016 GDP (-3.2%), although the 3Q16 report brings additional uncertainty due to the revision in the historical series. Short-term data have disappointed, but fundamentals remain stable, pointing to growth ahead, particularly in the industrial sector.

Rodrigo Miyamoto


 

 



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