Itaú BBA - We forecast GDP growth of 1.5% in 2017

Macro Vision

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We forecast GDP growth of 1.5% in 2017

diciembre 2, 2016

Inventories are set to contribute positively.

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In the short term, economic activity has been disappointing.  However, the fundamentals suggest a moderate increase in demand and, particularly important to the current setting, a positive contribution from inventories.  We have therefore revised our 2017 GDP growth forecast to 1.5% (previously 2.0%).

Short term disappointment, but fundamentals remain stable 

Recent reports revealed lower-than-expected levels of activity. Following the release of 3Q16 GDP figures and a revision in the historic series, we expect GDP to remain practically stable in the fourth quarter of 2016. We have therefore revised our 2016 GDP forecast to a -3.3% decline from -3.2%[1].

Although the statistical inheritance for 2017 will likely be worse than we previously forecasted, we believe fundamentals continue to suggest moderate GDP growth next year. 

We have divided our analysis into two parts: we have verified the fundamentals that influence demand and then analyzed the matter of the change in inventories.  

Fundamentals suggest a modest increase in demand

Nominal GDP represents output (measured in BRL) for the period, and can be written in terms of final demand and change in inventories:


Where the subscript n signifies nominal values, and:

Observing final real demand [2]  (), there are two significant drops in 2015 and 2016.

From the beginning of the historical series (1996) through to 2014, average demand growth has been 3%.  In 2015, demand shrank 2.7% and repeated this feat in 2016.  The recent recession can be accurately explained by analyzing a small set of fundamentals. 

First, after average annual growth of around 20% between 2004 and 2008[3] , commodity prices fell over 30% in 2015 and a further 7% in 2016.  On the positive side, we expect an 11% rise in commodity prices in 2017, with data at the margin already showing improvement, supported by stability in China, a recovery of oil prices (reinforced by the recent  agreement among OPEC countries) and the willingness of the new U.S. administration to implement infrastructure investments, all of which support this trend. 

The cycle of interest rate hikes that began in 2013 drove the SELIC to 14.25% by mid-2015, where it remained at that level until 3Q16.  In 2017, we expect the monetary easing that began at the end of this year to continue until the SELIC reaches 10%.

Finally, corporate leverage [4]  rose between 2011 and 2015.

At the margin, leverage has shown improvement in 2016. Falling leverage came about mainly due to a reduction of net debt. We believe this trend will continue going forward, as a result of continuing monetary easing, among other reasons. 

As such, we will see some relief in 3 key growth fundamentals.  A simple model shows that demand could grow up to 1% in 2017.

Inventories will likely make a positive contribution

Assessing the contribution from inventories, as shown by the national accounts, we note that output has been lower than demand since 2015.  In other words, the change in inventory has contributed to a lower level GDP. 

Additional research such as the FGV industrial survey and the Anfavea inventories data also show reduction. 

With modest growth in final demand, once inventories reach the desired level, output should rise to match demand so that inventories remain stable.  As a result, closing the gap between output and demand, which stood at 1% in nominal terms in 3Q16 (on a cumulative basis over 4 quarters), should contribute around 1 p.p. to GDP in 2017. It is worth noting that contributions of this magnitude have already happened, like in 2000 (1 p.p.) and 2010 (2p.p.)

We have revised our 2017 GDP growth forecast to 1.5% in 2017

In the short term, economic activity data have disappointed, suggesting a worse statistical inheritance than we previously estimated for 2017.  However, fundamentals continue to suggest a modest increase in demand and we estimate a positive contribution from the change in inventories. 

We have therefore revised our 2017 economic activity growth forecast to 1.5% (previously 2.0%). This forecast incorporates a 0.9 p.p. contribution from the change in inventories and a 0.6 p.p. contribution from a rise in aggregate demand.


Rodrigo Miyamoto


[1]  See Macro Brazil: GDP fell 0.8% in the third quarter

[2] Real final demand was calculated as follows:   Where P is the GDP deflator.

[3] Year average commodity prices

[4] Measured as net debt over EBITDA (earnings before interest, taxes, depreciation and amortization).



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