Itaú BBA - Rebound Gains Traction, Constraints Become Clearer

OrangeBook

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Rebound Gains Traction, Constraints Become Clearer

marzo 27, 2013

This report summarizes anecdotal information on current economic conditions.

Contents

Consumption and Production of Goods and Services
Most sectors report sales strengthening throughout the quarter, or maintaining the good level of late 2012. Some sectors, however, saw a loss of momentum.

Investment
Business confidence is improving. More sectors seem willing to invest, although risk aversion remains high.

Real Estate
Homebuilders expect sales this year to be unchanged or slightly above those of 2012. Inventories remain above optimum levels.

Commodities
This year’s Brazilian agricultural crops are expected to approach the highest on record, Bottlenecks on growth, however, cap income gains. The steel and mining sector reacts, after a weak 2012.

Labor Market, Production Costs and Prices
The improvement of economic activity at the beginning of the year allowed sectors to increase prices and rebuild margins. Inflationary cost pressures seem less intense looking forward.

Our View
The economy is headed for faster growth in 1Q13. However, the brisker pace is likely related to factors that tend to be temporary. We expect the economy to continue to expand, but on a moderate growth path. Inflationary remain worrisome.


Summary

Demand for consumer goods continues to grow at a solid pace. Most sectors report sales strengthening throughout the quarter, or maintaining the good level of late 2012. Some sectors, however, saw a loss of momentum. Going forward, the end of tax incentives recently obtained and higher level of consumer indebtedness are the main concerns.

Overall, the service sector is advancing at a slower pace than the average of the past few years, but current activity is still characterized as robust.

Business confidence is improving. More sectors seem willing to invest. However, risk aversion remains high. As the economy improves, the bottlenecks on growth become more evident, fueling concerns about future production conditions.

In real estate, homebuilders expect sales this year to be unchanged or slightly above those of 2012. Inventories, however, remain above optimum levels.

This year’s Brazilian agricultural crops are expected to approach the highest on record, sustaining the optimistic mood in the sector. However, expectations were revised somewhat downward in the past month due to adverse weather conditions. Bottlenecks on growth are evident in the Agriculture sector, capping income gains.

The steel and mining sector has experienced growth in early 2013, after a weak 2012. But, as internal and external uncertainties remain, there seems to be no relevant investment plans for 2013. Capacity utilization in the sector remains, on average, at low levels.

In oil and gas, activity is heated, but there is a perceived slowdown in investment (less drilling). National content requirements are becoming a binding constraint.

The labor market remains tight, with most sectors reporting difficulty in hiring employees and above-inflation wage adjustments. Only few accommodation signs were noticed.

The improvement of economic activity at the beginning of the year allowed sectors to increase prices and rebuild margins. Inflationary cost pressures seem less intense looking forward.

Our view: The economy is headed for faster growth in 1Q13. However, the brisker pace is likely related to factors that tend to be temporary. We expect the economy to continue to expand, but on a moderate growth path. Inflationary pressures tend to be lower in the short-run, but remain worrisome.

Consumption and Production of Goods and Services

Demand for consumer goods continues to grow at a solid pace. Sales strengthened throughout the quarter in some sectors, including food, cleaning products and construction material. Supermarket sales are overall described as strong.

The auto and household-appliance industries, which expected some weakening after strong results in 4Q12, were surprised as their high sales levels held steady. Going forward, the end of tax breaks and higher level of consumer leverage are the main concerns.

Although most segments report positive performance, some of them, such as clothing and linens, saw a loss of momentum. These companies say that some of their consumers have chosen to allocate their income to items favored by tax cuts (vehicles, household appliances and construction material).

In the last two editions of the Orange Book (November 2012 and January 2013), we reported signs of deceleration in the service sector. More recent reports show stability. Overall, the service sector is advancing at a slower pace than the average of the past few years, but current activity is still characterized as robust. As we have stated in previous editions of the Orange Book, the sector highlights are services related to production bottlenecks (logistics, education and personnel training).

Some companies which had been operating with tighter margins last year due to higher production costs (wages, currency depreciation, more expensive input) managed to raise prices in the beginning of the year. The initial reaction of customers - either retailers or the final consumer - was to reduce demand. But as the quarter advanced, the situation normalized and higher prices were sustained.

Good sales performance and margin recovery provide incentive to investment plans. However, uncertainties surrounding the availability of means of production - labor, transportation, energy, location - led many to delay their plans.

Investment

Business confidence is improving. Our business-confidence indicator, based on a survey of a broad range of clients, rose in March, reaching the highest level in 20 months. Nevertheless, the indicator is still 14% below the average in 2010, suggesting still a modest rebound.

More sectors seem willing to invest, including Commerce, Real Estate, Consumer Goods Production, Agribusiness, Transportation and Services.

Although the highlight is still the Agricultural sector, demand in segments related to infrastructure, basic materials, and construction has improved. Capital goods producers report a moderate acceleration in orders. Companies that supply inputs to capital goods producers also report improved activity in the first quarter, reinforcing the positive outlook. Despite the pickup in sales, inventories remain above normal levels. Moreover, the sector has expressed concern about the weak external demand.

The heavy-vehicle industry is still the most positive of the investment-related sectors, given the sustentation of the pickup in sales that began in mid-2012. According to auto companies, the fast pace of orders will support production until the end of the first half of 2013. The main sales driver continues to be the low (BNDES-subsidized) interest rates, but a better economic outlook also helps. The main short-term concern is the capacity to meet demand. Many input suppliers have been unable to fulfill orders (partly due to the low investment in 2011 and 2012), thus breaking the production chain.

More concrete signs of a demand recovery and favorable financing conditions have improved the investment environment. However, risk aversion remains high, and a substantial part of the current investment plans remains on hold. As the economy improves, the bottlenecks on growth become more evident, fueling concerns about future production conditions. Red-tape barriers on imports and uncertainties surrounding the country’s tax rules are also often cited as factors that inhibit investment.

Real Estate

Homebuilders expect sales this year to be unchanged or slightly above those of 2012. Sales speed continues to be characterized as “moderate to good,” although sales of medium-priced homes (around BRL 200-300 thousand) are clearly picking up. There has also been a notable acceleration in sales of small commercial properties (around 50m²). The movement is consistent with the consolidation of a lower real interest rate environment.

Most construction companies started 2013 with above-optimal inventory levels. Hence, the number of launches in 2013 should be about the same as in 2012, which is below the average for the previous years. Lower launches have led to a more moderate pace of construction works, relieving the pressure on suppliers and curbing cost increases.

The outlook for the shopping mall segment remains very favorable. The companies in the sector have reported good earnings. Despite rising Rental fees, vacancy rates remain very low. Forty-seven new shopping malls are scheduled to be opened in 2013. The sector is amassing capital in order to announce new expansion projects in the coming years.

Commodities

This year’s Brazilian crops are expected to approach the highest on record, sustaining the optimistic mood in the sector. Soybean and rice crops are among those with the strongest year-over-year growth. However, expectations were revised somewhat downward in the past month due to adverse weather conditions: excessive rainfall in the Center-West region and droughts in the Northeast.

In the sugar and ethanol industry, plantation yields for the 2013-14 crop in the state of São Paulo will be 4% to 12% higher than in the previous cycle, varying according to region. Satisfactory rainfall levels in the first two months of the year contributed to the adequate development of sugarcane plants.

Bottlenecks on growth are evident in the Agriculture sector, where income gains are limited by: i) stalled traffic on highways and in ports; ii) higher freight costs; iii) scarcity of new trucks; and iv) new labor regulations for truckers.

External demand remains strong, particularly as Argentina limits exports to relieve internal inflationary pressures. However, the bottlenecks in Brazil reduce the country’s export capacity.

A plentiful crop boosts demand for fertilizers and crop-defense chemicals, and sales have picked up during the quarter. Production in the sector is bound to increase by about 2% this year. The cost of input (mostly imported) is increasing due to a weaker exchange rate and rising chemical commodity prices in international markets. Demand allows for only some pass-through to prices because buyer’s income gains are limited by structural bottlenecks.

The beef industry has decoupled from the seasonal patterns in 2013. The beginning of the year is usually marked by weaker demand and a slight drop in exports, but the exact opposite is happening in 1Q13.

Steel and mining companies have experienced growth in early 2013, after a very weak 2012. In addition to a more favorable exchange rate, which has been boosting earnings since last year, external demand (from China) has rebounded and the construction sector shows signs of recovery. But, as internal and external uncertainties mount, there seems to be no relevant investment for 2013. Capacity utilization in the sector remains, on average, at low levels.

In oil and gas, activity is heated, but there is a perceived slowdown in investment (less drilling). National content requirements are becoming a binding constraint.

Labor Market, Production Costs and Prices

The labor market remains heated, with most sectors reporting difficulty in hiring employees and above-inflation wage adjustments. Only few signs of accommodation were noticed. In some cases, labor-market-related difficulties led some companies to delay their expansion plans.

Production costs rose for many reasons last year, including real wage adjustments that were higher than productivity gains, rental-fee pressure, currency depreciation, and higher commodity prices (particularly agricultural). Since late last year, many sectors indicated that margin compression had reached a limit and that prices would have to go up. The improvement in economic activity at the beginning of the year allowed for such increases in many cases. Meanwhile, tax breaks (particularly on electricity) helped to reduce costs. Hence, inflationary cost pressures seem less intense looking forward.

On the other hand, in many sectors, the inflation expectations included in budget plans for the next few years are being consolidated close to 6%.

Our View

We believe that the economy is headed for faster growth in 1Q13. However, the brisker pace is likely related to factors that tend to be temporary and affect industrial and agricultural and livestock activity. We expect the economy to continue to expand, but on a moderate growth path, in line with the 3.0% GDP growth forecast this year.

Concerning the inflation outlook, we expect some moderation ahead, thanks to tax cuts and lower food pressures. However, the recent price increases have been broader, and a heated labor market coupled with higher inflation expectations are boosting inflation as well as its resilience.

 

 

Relevant information

1.   This report has been prepared and issued by the Macro Research Department of Banco Itaú Unibanco S.A. (“Itaú Unibanco”). This report is not a product of the Equity Research Department of Itaú Unibanco or Itaú Corretora de Valores S.A. and should not be construed as a research report (‘relatório de análise’) for the purposes of the article 1 of the CVM Instruction NR. 483, dated July 06, 2010.

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