Itaú BBA - More consistent signs of a rebound


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More consistent signs of a rebound

abril 24, 2017

Most manufacturing-related segments point to a rebound in production.

With information through April 24, 2017

This report summarizes anecdotal information on current economic conditions received from key business contacts, economists, market experts, and other sources outside Itaú. Apart from the “our view” section, it is not a commentary on the views of Itaú’s Macroeconomic Research team.


Consumption and Production of Goods and Services
Most manufacturing-related segments point to a rebound in production, as the cycle of shrinking inventories finishes and demand picks up moderately. Consumption remains weak due to ongoing deterioration in the labor market, but there are also improving signs in this demand segment.

Sectors tied to demand for machinery and equipment suggest moderate growth in 2017, an important improvement after two years of sharp declines. Construction spending continues to fall.          

Labor Market, Production Costs and Prices
Falling inflation and interest rates provide significant relief to all sectors. Ongoing downsizing and lower pressures for wage adjustments are also important sources of cost decreases.

Expectations of record-high agricultural harvest this year are being confirmed. 

Our View
Falling interest rates, the end of the cycle of falling inventories, record-high agricultural harvest, higher international commodity prices and a recovery in consumer purchasing power (thanks to lower inflation) are consistent with a recovery in the Brazilian economy. On the other hand, deleveraging by companies and consumers and lingering uncertainties regarding fiscal reforms are limiting growth. Business and consumer confidence levels have been rising and recent activity figures are in line with positive growth in 1Q17 GDP (our forecast: 1.4%). According to our estimates. GDP will expand 1.0% this year and 4.0% in 2018.


Consumption and Production of Goods and Services

Signs from the steel, plastics and silicon industries point to growing demand related to industrial activity after two years of significant declines.

The auto industry reports growing output, as the process of falling inventories comes to an end and exports to Argentina increase. Furthermore, the auto industry is moving toward production of higher value-added automobiles, as the recession had greater impact on demand for lower-cost cars. The general consensus is that it will take years for the auto industry to operate with full capacity again, but recovery from current levels is apparently under way.

Sectors related to services and household spending still report weakness, especially due to the ongoing deterioration in the labor market. Some durable-goods segments report that sales are significantly below expectations, and 2017 was the first year in recent history in which some companies cut prices in Brazil.

However, some consumer-related sectors already report growing demand from individuals who held on to their jobs during the recession, but in the meantime increased their savings.


Spare capacity in the industrial sector and corporate deleveraging still weigh on investment. However, segments tied to demand for machinery and equipment suggest that capital expenses will be higher in 2017 than in 2016. In the auto industry, for instance, price inquiries and financing conditions for purchasing trucks are picking up, which often anticipate growing sales.

Construction spending continues to decline, particularly when public works are involved. There are great expectations regarding infrastructure concessions for the private sector, but indications are that this agenda could be advancing more rapidly.

Expectations for a drop in the benchmark Selic interest rate to one digit by the end of the year fuel some optimism in investment-related sectors. However, some apparently wait for more clarity regarding the new sustainable level of interest rates for investment projects.

Labor Market, Production Costs and Prices

Many sectors continue to cut personnel, and that has been a key source of cost-cutting for companies. Labor market rigidity (difficulties and costs to adjust labor) is still a problem, and in that sense, many segments highlight the importance of the labor reform, currently under discussion in Congress.

Falling inflation provides cost relief for most sectors. Interest rate cuts that already took place also reduce financial costs, but there are still reports that interest rates remain high.


The agriculture sector stands out. The soybean crop is coming to an end as its largest in history. The corn crop also shows robust growth, and producers will learn during the next month whether it is also the largest on record. In Mato Grosso State, about half of crops show all-time high yields, while the other half still depends on rainfall in the coming weeks.

Technology advances in agriculture are often mentioned, particularly crop defense chemicals and machinery. On the other hand, the country’s lack of quality logistics is mentioned as one of the biggest hurdles hindering the sector’s development.

Higher agricultural output has a downward effect on food prices, contributing to lower inflation. Additionally, crop gains generate positive (domino) effects in other sectors (manufacturing, services).


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