Brazil Economic Weekly

Transcription

1 Macroeconomic Research Department Macroeconomic Research Department Brazil Economic Weekly July 7 th 2017 Domestic outlook remains asymmetric: signs of a slow economic recovery and continuing disinflation in the wholesale and retail sectors We revised our outlook last month, making downward adjustments to economic growth and inflation, as a result of weaker current indicators. In general, the latest indicators released in June pointed in the same direction: activity data continued to suggest a moderate but uneven recovery, with the GDP expected to shrink in both the second and third quarters, while the inflation remains below expectations. In light of these surprises, our view is that the outlook remains asymmetric. For the time being, we have decided to collect more data before updating our estimates. There is little doubt on the general trend for inflation and, to some extent, we could say the same about GDP, despite some lingering uncertainties on the intensity of the latter. As a result, we have reinforced our outlook that the interest rate will continue to drop in the coming months, reaching 8.00% at the end of the year and staying at this level next year, or below that if the exchange rate stays within an expected range. In fact, the latest announcements by Brazil s monetary authority continue to stress how macroeconomic fundamentals inflation and economic activity play a crucial role in setting the trend for the policy (Selic) rate, considering the rhythm and duration of the ongoing cycle. For the exchange rate outlook, the domestic environment continued to impact share prices, but low levels of external vulnerability and a favorable global environment have continued to keep depreciation at a moderate level. The trade balance results remained robust, and service accounts and current transaction revenues, which had been showing an acceleration of the deficit in the beginning of the year, reversed this trend in a very consistent way in recent months. As a result, we have seen successive current transaction surpluses. With June s projected surplus of approximately USD 1 billion, current transactions will most likely close the first half in positive terrain. As a result, we have updated our service and revenue models with recent data, and now we forecast foreign deficit of USD 7.2 billion (equivalent to 0.35% of GDP), well below the USD 17.0 billion we expected before. For 2018, we have maintained our trade deficit outlook at 1.0% of GDP. BRAZIL ECONOMIC WEEKLY Global economic growth remained sustainable at the close of the second quarter The global economy provided more positive signs in June, after somewhat frustrating results in May. We highlight the improvement shown by recently released U.S. and Chinese indicators, and the European economy improvement at the end of the second quarter. Meanwhile, consumer inflation has raised little concern due to widespread deceleration especially in developed countries while wage gains remain tepid, despite the improvement in these countries labor markets. This combination of growth without significant price pressures suggests that the normalization of developed economies monetary policies will remain gradual, with some movements expected towards the end of the third quarter. As a result, the chances that the Fed will start to reduce its balance sheet between September and October cannot be ruled out. Extrapolating this assessment to the direction of economic policy and the price behavior of the main assets, we call attention to: the continued gradual normalization of monetary policy in developed economies; the low volatility of stock markets; the devaluation of the dollar against the great majority of currencies; and the recent upward movement in interest rates, resulting from moderate inflation rates and healthy global GDP dynamics. 1

2 Domestic outlook remains asymmetric:signs of a slow economic recovery and continuing disinflation in the wholesale and retail sectors We revised our outlook last month, making downward adjustments to economic growth and inflation 1, as a result of weaker current indicators. In general, the latest indicators released in June pointed in the same direction: activity data continued to suggest a moderate but uneven recovery, with the GDP expected to shrink in both the second and third quarters, while inflation remains below expectations. In light of these surprises, our view is that the outlook remains asymmetric. For the time being, we have decided to collect more data before updating our estimates. There is little doubt on the general trend for inflation and, to some extent, we could say the same about GDP, despite some lingering uncertainties on the intensity of the latter. As a result, we have reinforced our outlook that the interest rate will continue to drop in the coming months, reaching 8.00% at the end of the year and staying at this level next year, or below that if the exchange rate stays within an expected range. In fact, the latest announcements by Brazil s monetary authority continue to stress how macroeconomic fundamentals inflation and economic activity play a crucial role in setting the trend for the policy (Selic) rate, considering the rhythm and duration of the ongoing cycle. When it comes to economic activity, the latest results have been somewhat positive. Manufacturing output surprised by rising 0.8% on the margin in May; vehicle sales data have shown a clear upward trend since the beginning of the year; and loans to individuals have recorded a reasonable real-term increase over the past few months. However, some of the data have been impacted by one-off events. Such events include the withdrawals of deposits from the FGTS workers severance fund, as well as real income gains resulting from falling inflation, which are not likely to recur in the next few months (at least not to the same degree). Together, these effects are expected to contribute to the GDP shrinking 0.3% in the second quarter, which, when adjusted to the (negative) effects from agricultural production, would bring it close to flat growth. On the other hand, our previous and coincident indicators point towards another contraction in GDP for the third quarter, albeit moderate and subject to significant adjustments as the quarter progresses. Domestic Outlook 0,0 0,7 1,6 0,3-0,1 2,3 0,4 0,0 0,5-1,3 0,3 0,3-1,3-2,3-1,0-1,0-1,4-0,3-0,6-0, Inflation has continued to surprise by coming in below expectations, for both the consumer and wholesale, increasing our conviction that inflation outlook will remain benign. In addition, the still moderate economic 1,0-0,3-0,1 0,4 2,0 1,0 0,0-1,0-2,0-3,0 Chart 1 Quarterly percentage change in GDP, seasonally adjusted Source: IBGE, Bradesco activity, the confirmation of a favorable supply price shock and the anchoring of inflation expectations on all horizons are in line with our IPCA forecasts for 2017 and 2018, at 3.4% and 4.0%, respectively. 1 The 2017 GDP forecast was revised from a 0.3% expansion to a flat growth rate, while the 2018 GDP was adjusted from 2.5% to 2.0% growth. Consumer inflation (IPCA) was revised from 3.7% to 3.4% in 2017, and from 4.1% to 4.0% in

3 14,0% 12,0% 10,0% 12,5% 9,3% 10,7% Chart 2 Consumer inflation (IPCA), annual rate 8,0% 7,7% 7,6% 6,0% 5,7% 5,9% 5,9% 6,5% 5,8% 5,9% 6,4% 6,3% 4,0% 3,1% 4,5% 4,3% 3,4% 4,0% 2,0% 0,0% * 2018* Source: IBGE, Bradesco In the balance of risks for inflation, on the one hand there is the possibility that taxes may be raised, which could translate into higher prices for some products in the second half, while on the other hand there is the possibility of a slight frustration with current activity data and a new round of reduced inflation expectations in the coming months, aided by significant wholesale deflation. Therefore, we believe that the current balance of risks continues to point towards disinflation. Meanwhile, fiscal data have reaffirmed our expectation that the primary deficit might come in above target, unless additional compensatory measures are taken to bring it closer to the government s BRL 139 billion target. Revenues continue to show a real decline for the year, now at -1.7%, reflecting the moderate pace of economic activity. In addition, discretionary expenditures remain slightly above the seasonal pattern for this period, despite a significant effort to cut spending. In real terms, expenditures are down 1.1% for the year. Nonetheless, we believe the negative shock with the primary balance is due primarily to lower government revenues, since the spending cap has already brought expenditures under control. We find that an additional effort is needed to bring the result closer to the target, and thus believe that a tax increase cannot be ruled out for For the exchange rate outlook, the domestic environment continued to impact prices, but low levels of external vulnerability and a favorable global environment have continued to keep depreciation at a moderate level. The trade balance results remained robust, and service accounts and current transaction revenues, which had been showing an acceleration of the deficit in the beginning of the year, reversed this trend in a very consistent way in recent months. As a result, we have seen successive current transaction surpluses. Taking into account June s projected surplus of approximately USD 1 billion, current transactions will most likely close the first half in positive terrain. As a result, we have updated our service and revenue models with recent data, and now we forecast a foreign deficit of USD 7.2 billion (equivalent to 0.35% of GDP), well below the USD 17.0 billion we expected before. For 2018, we have maintained our trade deficit outlook at 1.0% of GDP Domestic Outlook Trade balance Current transactions, excluding trade balance May-96 Dec-96 Jul-97 Feb-98 Sep-98 Apr-99 Nov-99 Jun-00 Jan-01 Aug-01 Mar-02 Oct-02 May-03 Dec-03 Jul-04 Feb-05 Sep-05 Apr-06 Nov Jun-07 Jan-08 Aug-08 Mar-09 Oct-09 May Dec-10 Jul-11 Feb-12 Sep-12 Apr-13 Nov-13 Jun-14 Jan-15 Aug-15 Mar-16 Oct-16 May-17 Chart 3 Current transactions balance, excluding trade balance (USD million) Source: BCB, Bradesco 3

4 Finally, in the credit market, personal and corporate loans have performed quite differently. On the one hand, loans to individuals have shown signs of recovering: in May (seasonally adjusted), these loans were at their highest level since August The recovery has been driven by the performance of payroll loans, which have grown 40.0% year-to-date. On the other hand, corporate loans performance keep weak. We believe that corporate loans will lag behind economic activity, and should only provide more definite signs of recovery at the end of the year. In addition, monetary policy easing should help increase the amount of credit available in the market in the next few quarters. As a result, we expect the total amount of credit available to grow 1.0% in 2017 and 4.0% in In short, recently released indicators suggest that the economy is on the path towards stabilization, albeit moderate and irregular, and that current inflation is weaker than expected. These trends are somewhat asymmetric when compared to our outlook, as it now seems that the GDP might be weaker than previously thought, and inflation might come in below expectations. However, we have chosen to maintain our outlook, until we are more certain of the intensity of this asymmetry. Domestic Outlook 4

5 Global economic growth remained sustainable at the close of the second quarter Global Outlook The global economy provided more positive signs in June, after somewhat frustrating results in May. We highlight the improvement shown by recently released U.S. and Chinese indicators, and the the European economy improvement at the end of the second quarter. Meanwhile, consumer inflation has raised little concern due to widespread deceleration especially in developed countries while wage gains remain tepid, despite the improvement in these countries labor markets. This combination of growth without significant price pressures suggests that the normalization of developed economies monetary policies will remain gradual, with some movements expected towards the end of the third quarter. As a result, we should not rule out the possibility that the Fed will start to reduce its balance sheet between September and October. That possibility has impacted the currency market, with the strengthening of the U.S. dollar and the weakening of the euro. In our view, there is still room for a slight devaluation of the U.S. currency, but mostly against the currencies of emerging markets. The global industry s activity index (Global PMI) calculated by Depec-Bradesco rose from 53.3 points to 53.8 points between May and June. The index considers 36 countries and the Eurozone. This result suggests that the pace of manufacturing activity has slowed down over the period (noting that anything above 50 points indicates growth). The growth of PMI was driven by the positive performance of developed economies, especially the United States and the Eurozone, which recorded increases of 2.9 and 0.4 points, respectively. An opposite movement was led by the results from Japan and the United Kingdom, which fell 0.7 and 2.0 points, respectively. Meanwhile, emerging markets have shown some stability over the period. Brazil, India and Russia also recorded negative movements, with losses of 0.6, 0.7 and 2.0 points. On the other hand, China s PMI grew 0.5 point. Considering this pace of expansion, the global GDP is expected to grow approximately 3.9% (seasonally adjusted annual rate) in the second quarter. Since we had forecast a 3.4% growth for global GDP in 2017, we expect to see some deceleration in the next two quarters. The European economy recorded a sustained positive performance in the first half. Eurozone activity indicators continue to suggest consistent and widespread growth across all countries. The PMI average for the second quarter showed some acceleration when compared to the previous quarter, rising from 55.6 to 56.6 points. Amid this more benign context, expectations have increased that the European Central Bank (ECB) will soon announce its strategy to reduce monetary stimulus measures. However, even if this announcement takes place, we believe that interest rates will only begin to climb starting next year, and in a very gradual manner. On the other hand, the U.K. economy has frustrated expectations. This is partly due to the impact of political uncertainties concerning the country s exit from the E.U. These uncertainties have also contributed to the devaluation of the British pound and to the worsening of inflation expectations by imposing challenges to economic policy. Despite the short-term acceleration of inflation, we expect the Bank of England to remain cautious and resist any short-term changes to the monetary policy. At the same time, the U.S. economy continues to grow at a moderate pace, showing a gradual improvement of consumption indicators compared to the underwhelming performance in the first quarter. As a result, we have adjusted our secondquarter growth forecast from 2.0% to 2.3% (annual rate). By combining this adjustment with our revised first-quarter GDP growth (from 1.2% to 1.4%), we now expect GDP to rise 2.0% in 2017, down from our previous forecast of 1.9%. Despite more favorable growth conditions, the disinflation trend was not interrupted over the past few months, with the PCE 1 (both the full and core indices) moving further from the Federal Reserve target. Both indices are at 1.4%, which is well under the 2.0% target set by the Fed. There has been much speculation as to the reasons behind such low inflation, especially when considering today s low unemployment rates. The most commonly cited factors are related to wellanchored inflation expectations, which results from (i) 1 Personal Consumption Expenditure, a consumer price index that is the Fed s preferred inflation measure. 5

6 Global Outlook a long period of low and stable inflation in developed economies (ii) the potential effects of new technologies on the labor market, such as increased competition and the replacement of workers for machines, keeping wages in check. The fact is that inflation has been low and very well-behaved across most price categories, while wages have been rising at a moderate pace (approximately 2.5% year-on-year) and consumer inflation expectations are at the lowest levels ever. As a result, the normalization of monetary conditions will quite likely be a very cautious and gradual process, and should not represent a risk for markets on the foreseeable horizon. Therefore, we maintain our forecast of one additional interest rate hike for 2017 (in December), with the Fed beginning to reduce its balance sheet in September. Meanwhile, after slowing down between the first and second quarters, the Chinese economy stabilized in May and showed signs of a slight acceleration in June. That led to an expected GDP growth of 6.7% between April and June, compared to a 6.9% growth in the first quarter. Last month s improvement stems from an easing of the control over the financial system, partially loosening liquidity conditions in relation to previous months, while infrastructure investments remained strong. Nonetheless, adjustments have been made to key economic drivers, which had not raised much concern until now. In recent months, there have been significant adjustments to the liquidity of the financial system, housing policies and the currency formation mechanism. We maintain our positive outlook for China in 2017, assigning low probability of extreme events, but we find it prudent to monitor these risks over the short term, as they can bring some turmoil to global markets. In any case, we believe that the Chinese economy will continue to slow down in the coming quarters. However, the deceleration will be moderate and controlled, and should still guarantee the minimum growth of 6.5% in Even before some policies adjustments, we cannot forget the political transition that will take place next October. The top leadership of the Party will change hands, and economic stability is seen as a prerequisite to a smooth and successful political transition. In Latin America, current inflation has decelerated more sharply in recent months, allowing countries in the region to ease their monetary policies. We believe that the easing of monetary conditions should boost growth in the region over the next few quarters. Within the region, we can highlight the positive performance of Argentina, whose annual-rate GDP grew 4.5% in the first quarter of As far as price dynamics, Mexico has been a positive surprise, as the country had been the main exception in the region. Mexican inflation picked up due to the lagged effects of currency depreciation and fuel price increases in the beginning of the year. However, we already see signs that inflation has already peaked, and prices should converge towards the target over the course of Finally, commodity prices have risen again recently, despite conditions being closer to an equilibrium in supply and demand. In the case of grains, wheat prices rose approximately 25%, mainly due to worsening expectations for the next U.S. crop. Since the market is dictated by U.S. production, the expected decline in productivity is pushing international prices upwards, including for other grains (albeit to a lesser extent). However, the global stock-to-consumption ratio remains at its highest level since 2000, suggesting a downward adjustment in prices in the coming months. When it comes to oil, we continue to monitor the difficult balance between increased US production and reduced OPEC supply. In this case, the balance seems to be close to USD 50/barrel. When prices dropped too far below this level, U.S. producers cut their investment expectations, and, as we have seen in the past few months, prices above USD 50 raised the expectations for U.S. production. Therefore, the overall dynamics of the global economy remain favorable, without causing any major concerns to financial markets. It should be noted that political risks are under control when compared to the beginning of the year, considering the election results in Europe and the perceived threats concerning the Trump administration in the U.S. However, that doesn t mean that geopolitical issues are off the radar. Extrapolating this assessment to the direction of economic policy and the price behavior of the main assets, we call attention to: the continued gradual normalization of monetary policy in developed economies; the low volatility of stock markets; the devaluation of the dollar against the great majority of currencies; and the recent upward movement in interest rates, resulting from moderate inflation rates and healthy global GDP dynamics. 6

7 60,0 55,0 50,0 56,7 56,6 57,5 58,1 53,6 53,0 51,7 54,6 53,8 52,1 51,5 51,2 50,3 50,5 50,0 55,9 56,4 51,6 Chart 1 Global PMI Index (in points) 45,0 47,6 40,0 40,8 35,0 30,0 33,5 Developed economies Emerging economies Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Source: Bloomberg, Bradesco Chart 2 12-month Consumer Inflation Source: Bloomberg, Bradesco 8,0% 7,0% 6,0% 5,0% 4,5% 4,0% 3,0% 2,0% 1,0% 0,0% -1,0% -2,0% May-04 Sep-04 Jan-05 1,9% 3,4% 1,6% EMERGING ECONOMIES WORLD DEVELOPED ECONOMIES May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 6,9% 5,6% May-08 Sep-08 Jan-09 2,8% 0,8% -1,0% May-09 Sep-09 5,3% Jan-10 May-10 1,2% Sep-10 Jan-11 6,4% May-11 4,6% 3,0% Sep-11 Jan-12 1,5% May-12 Sep-12 5,4% Jan-13 5,8% 3,8% 4,9% 5,8% 3,2% 1,8% 2,6% 1,6% 0,8% 1,0% May-13 Sep-13 Jan-14 May-14 0,2% Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 2,7% 2,2% 1,6% 105,0 100,0 95,0 94,76 100,33 93,14 98,03 93,33 100,17 99,61 95,56 92,63 97,47 94,16 98,89 103,30 99,64 101,18 95,82 Chart 3 DXY (Dollar Index Spot, measuring the U.S. dollar against a basket of currencies) 90,0 86,69 85,0 80,0 02/10/14 30/10/14 27/11/14 25/12/14 22/01/15 19/02/15 19/03/15 16/04/15 14/05/15 11/06/15 09/07/15 06/08/15 03/09/15 01/10/15 29/10/15 26/11/15 24/12/15 21/01/16 18/02/16 17/03/16 14/04/16 12/05/16 09/06/16 07/07/16 04/08/16 01/09/16 29/09/16 27/10/16 24/11/16 22/12/16 19/01/17 16/02/17 16/03/17 13/04/17 11/05/17 08/06/17 06/07/17 Source: Bloomberg, Bradesco Global Outlook Chart 4 Benchmark yield for 10-year U.S. Treasury Note Source: Bloomberg, Bradesco 3,00 2,80 2,60 2,60 2,48 2,45 2,40 2,39 2,34 2,35 2,29 2,29 2,31 2,26 2,24 2,20 2,15 2,19 2,12 2,13 1,98 2,00 2,06 2,00 1,99 1,98 1,87 1,85 1,80 1,87 1,75 1,73 1,60 1,64 1,66 1,69 1,70 1,56 1,40 1,45 1,36 1,20 2,63 2,31 2,17 23/10/14 13/11/14 04/12/14 25/12/14 15/01/15 05/02/15 26/02/15 19/03/15 09/04/15 30/04/15 21/05/15 11/06/15 02/07/15 23/07/15 13/08/15 03/09/15 24/09/15 15/10/15 05/11/15 26/11/15 17/12/15 07/01/16 28/01/16 18/02/16 10/03/16 31/03/16 21/04/16 12/05/16 02/06/16 23/06/16 14/07/16 04/08/16 25/08/16 15/09/16 06/10/16 27/10/16 17/11/16 08/12/16 29/12/16 19/01/17 09/02/17 02/03/17 23/03/17 13/04/17 04/05/17 25/05/17 15/06/17 06/07/17 2,36 7

8 Bradesco Macroeconomic Forecast Bradesco Macroeconomic Forescast * 2017* 2018* DOMESTIC ACTIVITY, INFLATION AND INTEREST RATES GDP (%) Agriculture (%) Industry (%) Services (%) Private consumption (%) Government consumption (%) Investment (%) Exports of goods and services (%) Imports of goods and services (%) GDP (R$ billion - current prices) 3,109 3,333 3,885 4,373 4,805 5,316 5,779 5,999 6,266 6,552 7,032 GDP (US$ billion) 1,695 1,668 2,207 2,611 2,459 2,463 2,455 1,800 1,795 2,046 2,161 Population (million) Per Capita GDP (US$ - current prices) 8,716 8,469 11,083 13,229 12,345 12,254 12,109 8,808 8,713 9,855 10,33 Industrial Production - IBGE (%) Unemployment Rate - IBGE (%) Retail Sales - (%) CPI - IPCA - IBGE (%) CPI - FIPE (%) WPI - IGP-M - FGV (%) Nominal Interest Rates - Selic target (end of period - %) Nominal Interest Rates - Selic target (12-month - %) Real Interest Rates - Selic (12-month - %) EXTERNAL ACCOUNTS AND FX Trade Balance (US$ billion) Exports (US$ billion) Imports (US$ billion) Trade flow (exports + imports) (% of GDP) Deficit of Services and Income (US$ billion) Current Account Deficit (US$ billions) Current Account Deficit (% of GDP) Foreign Direct Investment (US$ billions) FX - end of period (R$ / US$) FX - yearly average (R$ / US$) Nominal FX devaluation (YoY - %) Nominal FX devaluation (average - %) International Reserves (US$ billion) Total Medium and Long term External Debt (US$ billion) FISCAL ACCOUNTS Primary Surplus (R$ billions) Primary Surplus (% of GDP) Public Sector Nominal Balance (% of GDP) Gross Public Debt (domestic and external) (R$ billion) 1,740 1,973 2,011 2,242 2,579 2,740 3,252 3,926 4,354 4,980 5,751 Gross Public Debt (domestic and external) (% of GDP) As of July 7 th (*) Forecast. na = not available. Source: Official figures Production and forecasts(*): BRADESCO 8

9 Team Fernando Honorato Barbosa Economists: Internships: Ana Maria Bonomi Barufi / Andréa Bastos Damico / Constantin Jancso / Daniela Cunha de Lima / Ellen Regina Steter / Estevão Augusto Oller Scripilliti / Fabiana D Atri / Igor Velecico / Leandro Câmara Negrão / Marcio Aldred Gregory / Myriã Tatiany Neves Bast / Priscila Pacheco Trigo / Regina Helena Couto Silva / Thomas Henrique Schreurs Pires Alexandre Stiubiener Himmestein/ Christian Frederico M. Moraes / Felipe Alves Fêo Emery de Carvalho / Felipe Yamamoto Ricardo da Silva / Gabriela Soares de Faria / Mariana Silva de Freitas / Rafael Martins Murrer Team - BRADESCO does not accept responsibility for any actions/decisions that may be taken based on the information provided in its publications and projections. All the data and opinions contained in these information bulletins is carefully checked and drawn up by fully qualified professionals, but it should not be used, under any hypothesis, as the basis, support, guidance or norm for any document, valuations, judgments or decision taking, whether of a formal or informal nature. Therefore, we emphasize that all the consequences and responsibility for using any data or analysis contained in this publication is assumed exclusively by the user, exempting BRADESCO from all responsibility for any actions resulting from the usage of this material. We all point out that access to this information implies acceptance in full of this term of responsibility and usage. The reproduction of the content in this report (partially or in full) is strictly forbidden except if authorized by BRADESCO or if the sources (the name of the authors, publication and BRADESCO) are strictly mentioned. 9