Itaú BBA - Confidence indicators decline sharply in Brazil, amid impacts of Covid-19

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Confidence indicators decline sharply in Brazil, amid impacts of Covid-19

Abril 15, 2020

The aggregate business confidence index fell 27.6 p.p. to 53.7, the lowest level since the beginning of the series

Talk of the Day 


FGV has anticipated preliminary results for its business and consumer confidence indexes in April, with the survey being conducted between April 1st and 13th (the original publication calendar remains as scheduled, with the final confidence releases by the end of the month). Unsurprisingly, the report shows sharp drops in confidence in the month. The strongest declines were in industrial and services business confidence (-39.0 p.p. and -34.9 p.p., respectively). In the construction sector, business confidence declined 29.1 p.p., whereas in the retail sector confidence fell 26.8 p.p. Consumer confidence dropped 22.1 p.p.

The aggregate business confidence index fell 27.6 p.p. to 53.7, the lowest level since the beginning of the series. This indicator, highly correlated with CAGED formal job creation, indicates a decline of around 250k formal jobs (seasonally-adjusted) in April. Importantly, the government has announced that CAGED numbers will not be released soon, which increases the importance of the PNAD Contínua household survey as a measure of labor market data.

We expect GDP to decline sharply in 1Q20 and 2Q20 – by 2.1% and 6.5% (not annualized), respectively – and to start a recovery process in Q3. We forecast GDP growth at -2.5% this year and +4.7% next year, boosted by base effects.

Coronavirus update: the latest official information from the Ministry of Health is that Brazil has 25,262 confirmed cases (up by 1832, vs. 1261 yesterday), with 1532 confirmed deaths (up by 204, vs 105 yesterday).

Day Ahead: Local news indicate that the Senate may vote the so called “War-budget” constitutional amendment today. The bill creates a separate budget, with the purpose of expediting fiscal relief measures to companies and workers during the pandemic, while also helping to prevent that emergency expenditure measures undertaken this year do not perpetuate over time. Additionally, the bill gives more instruments for the Central Bank to act in the crisis, such as the authorization to buy and sell government and corporate debt securities (limited to the state of public calamity period)


The central bank of Colombia reinforced liquidity measures and extended quantitative easing. Aiming to address tightening financial conditions due to the coronavirus outbreak, the central bank announced new measures to provide liquidity in pesos. In an extraordinary meeting, the board cut the legal banking reserve requirement ratio for checking and saving accounts to 8% (11% previously) and for short term deposits to 3.5% (from 4.5%). According to the press release, the measure is expected to ease COP 9 trillion (0.9% of GDP) into the economy, starting next Wednesday (April 22). Moreover, the board authorized additional intervention in the public debt market with TES purchases of up to COP 2 trillion during April (0.2% of GDP) in the secondary market. The announcement follows the recent 50 bps interest rate cut to 3.75% and liquidity measures announced over recent weeks. We see an additional rate cut this month to 3.25% as inflation expectations moderate on the back of an anticipated widening of the negative output gap as the Colombian economy encounters significant shocks.

Day Ahead: Activity indicators for the month of February will be released at 12:00 PM (SP time). Activity indicators for January retained similar dynamics to recent months, with robust consumption leading growth, while manufacturing surprised to the upside. Retail sales grew 7.5% yoy in January (7.1% in December), while manufacturing increased 3.7% yoy (3.2% in December). Low inflation, robust credit growth and persistent immigration flows have supported retail activity, despite low confidence, while recovering manufacturing is responding to solid domestic demand. For February, still before the economic shutdown, we expect retail sales to increase 7.2%, while manufacturing is set to grow 3.0%.


Day Ahead: The INDEC (the official statistical agency) will publish the National CPI for March at 4:00 PM (SP time). Elypsis consulting estimated a 2.3% month-over-month increase for consumer prices. If this estimate is correct, annual inflation will decelerate to 46.8%, from 50.3% in February.


Day Ahead: The statistics institute (INEI) will release February’s GDP proxy. We estimate the GDP proxy grew 3.3% YoY, from 3.0% in January. For the natural resource sectors, we expect a recovery in fishing output, reflected also in primary manufacturing, while mining output slowed down. On the non-natural resources side, we expect construction output improved (consistent with a recovery in public capital expenditure execution), while services sector moderated its growth pace.

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