Itaú BBA - We increased our 1Q17 GDP forecast to 1.4% from 0.5%

Macro Vision

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We increased our 1Q17 GDP forecast to 1.4% from 0.5%

abril 24, 2017

Our scenario assumes a strong contribution from agricultural production.

Please open the attached pdf to read the full report .

Our scenario assumes a strong contribution from agriculture, a favorable carryover for industrial production and stabilization in service activity. 

Methodology changes in the series for retail sales and for real revenues generated by services have little relevance to the narrative during this period.

Given that the advance is driven by specific factors concentrated in 1Q17, our 2017 forecast of 1.0% is maintained for now. The pace and consistency of the rebound depend on the progress of reforms led by the government. 

GDP increase in 1Q17 was driven by agriculture and the carryover for industrial production

Based on Itaú Unibanco’s monthly GDP data and other economic-activity indicators, we revised our 1Q17 GDP estimate upward to 1.4% qoq/sa from 0.5%. We expect a revision of 4Q16 GDP to -0.6% from -0.9%.

The figure results mainly from a positive contribution from agriculture GDP, with forecasted gains of 16% for the soybean crop and 46% for the corn crop (vs. 2016). According to our calculations, most of the positive contribution will take place in 1Q17, due to the methodology used by the census bureau, IBGE, to distribute each crop across quarters.

Industrial GDP will also contribute positively in 1Q17. Notwithstanding the stagnation seen in the first two months of the year (-0.2% in January and +0.1% in February, seasonally adjusted) and our estimate of a 0.7% slide in March, the robust increase seen in December 2016 ensures a positive statistical carryover into 1Q17.

Finally, we forecast near-zero contribution from the service sector, with stabilization in real revenues.

Methodology changes have little relevance to quarterly growth 

What happened?

IBGE updated the methodology for the monthly retail survey (PMC) and monthly service survey (PMS) starting in 2017. The approach involved chaining the previous series to the new one, defining the base level for both by using comparisons with 2014.

The evolution of the sample is important to maintaining the representativeness of aggregate economic conditions. However, chaining the series could theoretically place the change in the path accumulated since the base period in a single month (from the last month of the old series to the first month of the new series). For instance, if the new series presents a decline of x% since 2014 according to the old sample and y% according to the new sample, the difference (x-y percentage points) accumulated over two years will be fully shown in the first month of the series estimated according to the new sample.

The first report under the new methodology, referring to January 2017, led to lower-than-expected readings for retail sales and real revenues from services. Core retail sales fell 7% yoy, while the median of market expectations pointed to -4.3%. Real revenues from services dropped sharply, by 7.3% yoy, while the median of market expectations suggested a milder decline of 4.5%.

February data led IBGE to identify the need to recalculate the survey’s base year (2014), prompting upward revisions in the January results. The gross reading for core retail sales increased 6.2 pp and the result for real revenues from services was adjusted by 4.1 pp (see table).

The adjustments brought results closer to the expectations for the first release. Anyhow, the base change implies some uncertainty regarding how much of the change was caused by chaining the series and how much represents the actual change that took place in January.

To what extent can the new methodology affect GDP?

In order to assess whether the GDP reading would be much affected by eventual changes related to chaining the series, we used two strategies. The first involved limiting the increase in the breakdown of retail sales and real service revenues by 2 standard deviations, and estimating quarterly GDP with the adjusted series. The second strategy reduced, from January onward, the series that printed above what models forecasted (based on coincident indicators that did not experience the change in methodology). Please see the appendix for further details.

Strategy 1:

The adjustment reaches two components of retail sales (Supermarkets and Textiles), leading to a 3.4% drop in core retail sales. It also affected two components of the monthly service survey that we used in our models (“IT & Communication” and “Storage and Mailing”). The GDP forecast based on the corrected series is 0.3 pp lower than the estimate produced by the original series.

Strategy 2: 

We reduced the level for broad retail sales by 4 pp. As for the components of the monthly service survey, we reduced “Transportation and Storage” by 2.2 pp, and “IT & Communication” by 5.3 pp. The impact on the GDP forecast is approximately 0.4 pp.

Importantly, both strategies are conservative, given that they adjust only variables that, under some criteria, should be revised downward. A symmetrical adjustment – i.e. one that also limits/corrects the series that declined further than the same criterion suggested – would nearly halve this impact.

Forecast for 2017 remains at 1.0%, despite 1Q17 revision

According to our calculations, the statistical carryover for 2017 GDP will increase to 0.5% from -1.1%. In addition to positive growth in 1Q17, the release should prompt a revision in the seasonal adjustment of the previous quarter. The revision tends to lift the seasonally adjusted quarterly change for 4Q16 to approximately -0.6% from -0.9%.

Nevertheless, we maintain our forecast for 2017 at 1.0%. Our rationale is that conditions that led to a peak in growth in 1Q17 will not be there in the following quarter. Firstly, the contribution from agriculture GDP will be smaller (a negative reading in the seasonally adjusted quarterly comparison and a not-so-positive reading in year-over-year terms). Secondly, unlike 1Q17, the statistical carryover for industrial production tends to be unfavorable (our preliminary forecasts for industrial production in March and April stand at -0.7% and -0.8%, respectively).

All in all, we are waiting for signs of a more broad-based recovery so that 2Q17 GDP could also be positive and forecasted growth for 2017 could be higher than our current scenario. Progress in reforms led by the government is crucial for this scenario to materialize.


Artur Manoel Passos


Please open the attached pdf to read the full report .

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