LatAm Talking Points: Brazilian Economic Activity Edges Up in October

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1 LatAm Talking Points LatAm Talking Points: Brazilian Economic Activity Edges Up in October Talk of the Day Brazil Out this morning, the Central Bank s economic activity index gained 0.36% seasonallyadjusted from September to October, slightly stronger than our forecast and market estimates (both at 0.3%). Our Itaú Unibanco monthly GDP grew 0.5% seasonally-adjusted from September to October, after a decline of same magnitude in the previous month. The 8.0% rise in retail sales, boosted by soaring car sales, gave the largest contribution to our monthly GDP. The tax breaks for car sales have been in part responsible for the ups and downs of economic activity on a month-on-month basis. Data related to industrial production and retail sales suggest that economic activity will decrease in November. Our preliminary estimate is that the Itaú monthly GDP will decline by 0.1% seasonally-adjusted from October to November. ** Full story below. LatAm Economic growth in Latin America has been weaker than expected in recent months. Our Itaú Surprise Index LatAm (Bloomberg: ITMRLAI) reached in October its lowest level in five months. Brazil s economy has been a major source of disappointment, so as Colombia s. Growth in Mexico has been slowing more steeply than market expectations, after significant good surprises earlier this year. Chile s economic growth, on the other hand, outpaced expectations for the 11th straight month. ** Full story below. Colombia Central Bank president Uribe said yesterday that the bank may cut its inflation forecast for next year below the target s mid-point of 3%. He added that the Central bank s concern over excess credit growth diminished significantly, after loan growth slowed this year. These remarks raise the odds for additional rate cuts ahead, in our view. Angel Custodio Cabrera, the lawmaker who earlier this week had proposed a reduction in the income tax rate on foreign investments in the local debt market from 33% to 25%, said yesterday that he agrees in the reduction to 14%, in line with the bill s initial proposal. Chile Yesterday, the Central Bank kept the policy rate unchanged at 5.0%, as widely expected. The board sees the low inflation figure for November as a result of "specific factors", but core inflation is around 2%, while inflation expectations for the monetary policy horizon are at the target. Members also noted the appreciation of the peso against the dollar. The next relevant document for monetary policy will be the monetary policy report, scheduled for release on December 17, before the publication of the minutes of yesterday s meeting. ** Full story below. Please refer to the last page of this report for important disclosures, analyst and additional information. Itaú Unibanco or its subsidiaries may do or seek to do business with companies covered in this research report. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the single factor in making their investment decision.

2 Venezuela President Hugo Chavez endured complications due to bleeding during his cancer surgery in Cuba, according to Information Minister Ernesto Villegas. The minister added that surgeons took corrective measures to control the bleeding, but the president s recovery will not be immediate. Argentina Privately-estimated consumer prices increased 1.8% from October to November, taking annual inflation to 25.4% (our year-end forecast: 25%), despite the weakness in economic activity. Inflation expectations for the next 12 months stands at 30% (median value), according to a survey conducted by Universidad Di Tella. For next year we expect inflation to reach 28%, as the government maintains the expansive monetary policy. On a separate note, the IMF said that the board will not discuss until next year the report on the status of official statistics that the country must submit next Monday. INDEC, the official institute, has nailed the inflation reports at 9%. Last September, the IMF managing director, Christina Lagarde said: "We had to choose between the yellow card and the red card. We chose the yellow card. If no progress has been made, then the red card will be out". Itaú Macro Research Europe Economic Roundup No immediate decisions on EU meeting; Greece loan transfer confirmed; SAREB sells first equity stakes Today s Eurogroup meeting ended without any formal resolutions, only a roadmap for future reforms intended to strengthen the monetary union. The document released after the meeting established four issues to be discussed in the June 2013 European council, presenting a timeframe for their implementation: - Coordination of national reforms. Major economic policy reforms in countries will be discussed beforehand with other EMU member to ensure coordination - Social aspects of the EMU - Mutual contracts for ensuring competitiveness and economic growth in the area - Solidarity mechanisms (i.e. a common budget) These last two points were the ones where most disagreement was expected as they imply binding economic reforms and larger contributions to the EU from member states. By delaying any concrete measures until June European leaders have bought themselves time to build more consensus into these issues. The transfer 34.3 billion euros to Greece was also confirmed by EU officials yesterday. 16 billion will go towards recapitalizing the country s banks, 7 billion to cover the budget deficit and the remaining 11.3 billion will go towards funding the debt buyback finished this Tuesday. The first round of equity investments into the Spanish bad bank SAREB was also completed this week. The local government is eager to have significant private participation - above 50% - so that the entity is not accounted for in the country s already battered balance sheet. All Page 2

3 investors were local banks, which, given the current state of the sector in Spain, does not bode well for the plans of limiting the public stake in the bad bank. Euro-Zone preliminary PMIs came up in December and slightly above expectations on average.services PMI beat expectations while, Manufacturing PMI came in slightly below consensus. The recent increase in PMI signals that GDP might be stabilize in the 1q13, but our tracking model (with soft data) indicates that real GDP will post -0.35% q/q in the 4q12 (the tracking with soft and hard data is -0.50% q/q in the 4q12) - Euro-zone PMI Composite came up to 47.3 from 46.5 (expectation: 46.9). - Euro-zone PMI Services came up to 47.8 from 46.7 (expectation: 47.0). Euro-zone PMI Manufacturing came up to 46.3 from 46.2, but below consensus (BBG: 46.6). Itaú Macro Research Our Research Notes Today BRAZIL - Itaú Unibanco monthly GDP rose 0.5% mom/sa and 4.3% yoy in October - Itaú Itaú Unibanco monthly GDP (PIBIU) [1] rose in October, in the same magnitude as of its fall in September. The significant expansion of retail sales and increased mining activity led the economic growth. The auto sector was again the highlight, contributing to greater fluctuations in monthly GDP in the recent period. After contributing to economic growth in August and drop in September, the sector again drives up the economy in October. However, it is worth noting that early in the fourth quarter the expansion was more widespread. For November, the signs point to weakness. Available data suggest that the October expansion was not sustained. The preliminary reading of Itaú Unibanco monthly GDP points to a slight contraction in November. Page 3

4 Itaú Unibanco monthly GDP increased 0.5% mom/sa and 4.3% yoy in October. The growth was above the preliminary reading (0.4% and 3.8%, respectively) released along with the September report. The expansion rate for the quarter ended in October was 0.9% qoq/sa, slightly above the variation of 0.8% of the previous month. Over 12 months, Itaú Unibanco monthly GDP rose from 1.8% in September to 2.0% in October. The retail sector, with a sharp increase of 8.0% mom/sa, provided the highest contribution to monthly GDP in October. The second largest contribution came from the mining activity. Vehicle sales, affected by the IPI tax cut, have increased the monthly volatility of the economic activity. This swings should remain high in the coming months. We highlight the widespread expansion of economic activity in October. Nine out of the ten sectors that comprise the monthly GDP grew at the margin. Preliminary indicators point to a slight drop in economic activity in November. The available data (energy consumption, vehicle production, shipments of cardboard paper, traffic of heavy vehicles on highways, and confidence among industrial entrepreneurs) point to a drop of 0.8% in industrial production, while indexes correlated with retail suggest a fall of 2.2% in broad retail sales. In this context, the preliminary reading of Itaú Unibanco monthly GDP points to a retreat of 0.1% mom/sa, and a lift of 2.1% yoy in November. Page 4

5 In short, economic activity has advanced in October following contraction in September. For November, the preliminary reading for Itaú Unibanco monthly GDP suggests slight decline. In this scenario, even with a stronger acceleration of economic activity in December, GDP growth in the fourth quarter is expected to be only slightly higher than that reported in the third quarter. Aurélio Bicalho Economist Itaú Surprise Index LatAm: Down Again Economic growth in Latin America has been weaker than expected in recent months. Our Itaú Surprise Index LatAm (Bloomberg: ITMRLAI) reached in October its lowest level in five months. Brazil s economy has been a major source of disappointment, so as Colombia s. Growth in Mexico has been slowing more steeply than market expectations, after significant good surprises earlier this year. Chile s economic growth, on the other hand, outpaced expectations for the 11 th straight month. Our Itaú Surprise Index LatAm compares trends in economic activity indicators to what analysts had been expecting for them. It is a GDP-weighted average of separate indexes for Brazil, Mexico, Chile, Colombia and Peru. An above-zero reading means good surprises. Below zero means disappointment. Surprises in activity often trigger revisions in GDP growth estimates. Page 5

6 Brazil: Slow Recovery Brazilian GDP is recovering, but growth has been slower than expected. Third-quarter GDP grew 0.6% seasonally-adjusted from Q2, the strongest reading in the year but half as much as expected by the market (1.2%). Additionally, Industrial production grew 0.9% seasonallyadjusted from September to October, but the expansion was also weaker than market estimates. As a result, the Itaú Surprise Index Brazil (Bloomberg: ITMRBI) stands at points in October, the lowest level in 4 months. The breakdown of the third quarter GDP was also concerning. Growth was highly dependent on the auto sector, which received direct stimulus from the government. Investment, which is crucial for a sustained expansion of the economy, declined for the fifth consecutive quarter. The median GDP growth estimate for 2012 came down to 1.0%, from 1.5% in early November, according to the Central Bank survey. We forecast 0.9%. For next year, consensus estimates point to 3.5% growth, while we forecast a 3.2% gain. The unfavorable outlook for investment leaves room for further disappointments in Brazil s economic activity. Page 6

7 Mexico: Negative Surprises After 13 straight months in positive territory, Itaú Surprise Index Mexico (Bloomberg: ITMRMI) came down steeply to points. The economy lost steam by the end of the third quarter, with the IGAE monthly GDP posting 1.3% year-over-year growth in September (consensus: 3.2%). In October, industrial production declined by 0.9% seasonally-adjusted, with manufacturing and construction losing ground. The negative surprises in third-quarter growth came along with upward revisions to the GDP series in the first half of the year. This led us to maintain our GDP growth forecast for this year unchanged at 3.8% and also revised our surprise index that went further up in the first half of As a result, Mexico s surprise index enjoyed the best performance within LatAm countries earlier this year and moved to second worst performer in September and October. Page 7

8 Colombia: Just a Cyclical Slowdown The strongest disappointments in economic activity have come from Colombia. Both consumption and manufacturing production have grown less than market estimates in recent months. Manufacturing came at -1.3% year-over-year in September, while consensus pointed at a 0.6% gain. Retail sales rebounded to 2.3% year-over-year in September, but the positive result followed notable disappointments in July and August. The Itaú Surprise Index Colombia (Bloomberg: ITMRCOLI) reached points in September, the lowest within the countries under our coverage. Manufacturing exports have been growing stronger than manufacturing production, which suggests that the slowdown in local consumption is weighing on production growth. And the lost of steam in local consumption owes to the deceleration in consumer credit, which we believe will remain subdued in coming quarters. That said, investment keeps growing at a fast pace. In the second quarter, investment grew a solid 6.6% seasonally-adjusted from the first quarter, and preliminary indicators for the third quarter, such as construction licenses, hint that the investment cycle remains positive. Thus, looking beyond the current credit cycle, we believe that the fundamentals of the Colombian economy remain solid and that reflects in the positive trend for investment growth. We forecast 2013 GDP growth at 4.2%. Chile: The Outperformer Chile s economic growth continues to outpace expectations, as rapid growth in real labor income supports consumers and investment has resisted short-term swings in copper prices. In October, both manufacturing and the IMACEC monthly GDP came in higher than market estimates. The Itaú Surprise Index Chile (Bloomberg: ITMRCHLI) stood at positive territory for the 11 th straight month in October. Accordingly, the Central Bank survey shows that the consensus GDP forecast for this year went up from 4.0% in the beginning of the year to 5.5% in the December survey. Page 8

9 Luka Barbosa Economist CHILE - Central Bank Leaves the Policy Rate Unchanged in December - Itaú As widely expected, Chile's central bank left the policy rate unchanged, at 5.0%. According to the press statement released after the decision, the international financial conditions improved somewhat since the last meeting but risks related to the euro-zone crisis and to the fiscal problems in the U.S. remain high. Although growth in the developed economies is still slow, there are positive signs in some emerging economies. On the domestic front, recent activity and demand were stronger than expected during the 3Q12, amid tight labor market conditions. The board sees the low inflation figure for November as a result of "specific factors", but core inflation is around 2%, while inflation expectations for the monetary policy horizon are at the target. The board also noted the appreciation of the peso against the dollar. The statement was therefore very descriptive, as usual. A better guidance for future monetary policy decisions will likely be given on the next monetary policy report, which is scheduled for release on December 17 (before the publication of the minutes of today's meeting). Specifically, it will be key to check if the central bank assumes rate moves in the new baseline scenario. In our view, the central bank is unlikely to change its neutral tone. We expect the policy rate to remain at 5.0% for the remainder of the year and throughout the next. Finally, as the peso returns to the pesos to the dollar range, the central bank will likely state in the report that the exchange-rate is around the lower part of the range consistent with fundamentals, suggesting again that a stronger appreciation can trigger intervention. João Pedro Bumachar Economist Page 9

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