Itaú BBA - Recovery becoming widespread

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Recovery becoming widespread

octubre 2, 2017

Several sectors report substantial improvements in sales in the last 6 months.

With information through October 2, 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.

Contents:

Consumption and Production of Goods and Services
Several sectors, ranging from the pharmaceutical industry to hearing aids, toys, foods and beverages, report substantial improvements in sales in the last 6 months.

Investment
On the funding side, the volume of new issuances in the debt capital markets is growing strongly, probably reflecting lower interest rates and the decline in BNDES participation.

Labor Market, Production Costs and Prices
We see no indications of rising price pressures on the economy, as industries report that retailers are unwilling to accept prices increases of any sort.

Commodities
A record-high crop and substantially low prices for some agricultural commodities is certainly the theme of the year. But we also highlight reports of a slow but steady recovery in the Oil&Gas sector. 

Our View

The improvement in economic activity data is becoming more widespread, and we have recently revised this year’s GDP growth forecast to 0.8% from 0.3%. For 2018, we expect 2.7% growth. The unsustainable public debt dynamics, however, continues to be the economy’s main vulnerability. Further reforms (especially the changes in the social security system) are a necessary condition for the recovery to be sustainable. 


Consumption and Production of Goods and Services

Consumption seems to be consolidating a rising trend, as consumers benefit from the inflation drop and the improvement of credit conditions.

Several sectors, ranging from the pharmaceutical industry to hearing aids, toys, foods and beverages, report substantial improvements in sales in the last 6 months. Reports from high-end retailers indicate sales continue to surprise on the positive side, especially in the A and B classes.

The auto sector reports that sales have been better than expected, with a surprising composition: more sales to rental companies than the final consumer.

Investment

As consumption starts to pick up more consistently, the next question becomes: will investment rebound as well? On the funding side, the volume of new issuances in the debt capital markets is growing strongly, probably reflecting lower interest rates and the decline in BNDES participation. Some sectors have also started to look for new loans for investment projects, but demand so far has been timid.

There are several indications that the lower level of interest rates is benefiting the deleveraging process among companies, opening the doors for some investment, despite the low level of capacity utilization in the industrial sector.

The IT service providers report increasing demand from their clients, with a highlight to the health sector in which investment in technology is becoming indispensable.

Labor Market, Production Costs and Prices

We see no indications of rising price pressures on the economy, as industries report that retailers are unwilling to accept prices increases of any sort. Pressure from the labor market is also subdued, with several indications that companies see no need to increase their number of employees at this stage of the cycle.

The more appreciated exchange rate is also frequently mentioned as a factor containing prices.

Commodities

A record-high crop and substantially low prices for some agricultural commodities is certainly the theme of the year. But we also highlight reports of a slow but steady recovery in the Oil&Gas sector. Funding for the sector (through bank loans) is recovering from extremely low levels, and there is substantial interest from foreigners on the pipeline of new oil auctions. The positive impact from this improvement on the economy will, however, show more clearly only between 2 and 5 years from now.

Our View

The improvement in economic activity data is becoming more widespread, and we have recently revised this year’s GDP growth forecast to 0.8% from 0.3%. For 2018, we expect 2.7% growth. The unsustainable public debt dynamics, however, continues to be the economy’s main vulnerability. Further reforms (especially the changes in the social security system) are a necessary condition for the recovery to be sustainable.



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