Macro Research Economic outlook

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1 Macro Research Economic outlook Macroeconomic Research Itaú Unibanco April 2017

2 Roadmap Global Economy The global outlook remains favorable Global growth positive momentum continues, with a synchronized pick-up in activity indicators; In the U.S., a further disappointment with Trump administration s agenda poses limited risks to the economy and asset prices. We expect growth to pick-up in 2Q17; In Europe, all eyes are in the French election, which is an important short term risk for the global economy geopolitical tensions are also rising in the Middle East and Asia. Meanwhile, growth remains solid in the euro area; China outlook remains stable. Brazil Inflation continues to fall, Central Bank increases pace of easing GDP is likely to show positive growth in 1Q17, driven by high agricultural output; Congress will debate Social Security reforms in April. We expect the reforms to be approved in 3Q17; We have maintained our exchange rate forecast (BRL 3.35 to the dollar at end 2017 and BRL 3.45 to the dollar at end 2018). We have reduced our IPCA inflation projection for this year to 3.9% (from 4.1%). Our 2018 forecast is unchanged at 3.8%; The central bank increased the pace of interest rate cuts. We expect the Selic rate at 8.25% by the end of 2017 and 2018.

3 Global Economy: Our forecasts World USA Eurozone Japan China Source: Itaú Unibanco, Haver Analytics

4 The global outlook remains favorable The manufacturing cycle remained favorable in March. The rise has been synchronized across all the main regions (US, Europe, China, Japan, EM ex-china). Global PMIs Index US Euro Area Japan China Emerging ex-china Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Source: Haver Analytics, Itaú

5 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 U.S.: Improving fundamentals limits downside risks of disappointments in the Trump agenda It is true that consumer sentiment looks too high compared to fundamentals. However, business confidence doesn t seem stretched and mainly reflects the improvement in the global economy; We estimate that a correction for excessive optimism about president Trump s agenda would reduce our Current Activity Index (CAI) to 3% from 4%. It should be noted that a fall to a 3% is still a solid pace and it is in line with our forecast that GDP will accelerate to 3.0% in 2Q17 and end 2017 at 2.3%; We continue to forecast US GDP to grow 2.3% and 2.4% in 2017 and Consumer Confidence Index Consumer Confidence 0 Model (*) Jan-02 Jun-04 Nov-06 Apr-09 Sep-11 Feb-14 Jul-16 Dec-18 GDP Growth %, annualized 5,5% 4,5% 3,5% 2,5% 1,5% 0,5% -0,5% -1,5% -2,5% 1,6% 2,3% 2,4% (*) Model variables: CPI, unemployment rate, S&P500 Index Source: Itaú, Haver Analytics QoQ Annual

6 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 Europe: all eyes on the French elections As we approach the French election s 1st round on April 23th, markets are likely to become volatile as investors hedge against a negative outcome; The risk of a second round between far-left Jean-Luc Mélenchon and far-right Marine Le Pen has been growing. Nonetheless, our baseline remains that Le Pen and Macron will advance to the second round and that the latter will win the election. Macron has been consistently 20ppt above Le Pen in run-off polls; If the French election does not bring along a negative surprise, the outlook for Europe will brighten for the rest of the year. Voting intentions French election % GDP Growth % annualized 30% 25% 2,5% 2,0% 1,5% 1,7% 1,6% 1,3% 20% 1,0% 15% 0,5% 0,0% 10% Hamon Macron 5% Fillon Le Pen Mélenchon 0% Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 Source: Haver Analytics, Institutos de Pesquisa Nacionais, Itaú -0,5% -1,0% -1,5% QoQ Annual

7 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 China: steady growth continues Economic activity in China remained steady in March. The official manufacturing PMI rose to 51.8, advancing to the highest level since July The Caixin manufacturing PMI did fall to 51.2 from 51.6 but still remain at a sound level; We still expect economic growth in China to weaken in 2H17, as the government tightens policy; We forecast 6.4% GDP growth for 2017, with a slowdown in 2H17, and 5.8% growth for PMI Indexes Índex NBS PMI Caixin Manufacturing 35 Apr-05 Apr-07 Apr-09 Apr-11 Apr-13 Apr-15 Apr-17 Source: Haver Analytics, Itaú, NBS GDP Growth %, annualized 8,5% 8,0% 7,5% 7,0% 6,5% 6,0% 5,5% 5,0% 4,5% 4,0% QoQ 6.7% Annual 6.4% 5,8%

8 LatAm: financial conditions and economic growth remain disconnected The global environment remains supportive for LatAm assets, and the Mexican peso has outperformed its peers; At odds with our earlier view, economic activity remains weak in South America, but is still resilient in Mexico. We have reduced our growth forecasts for this year for Peru, Chile and Colombia, but increased them for Mexico; There is an easing bias for monetary policy in most South American countries (Argentina is an exception), while in Mexico, the central bank reduced the pace of interest-rate hikes. Financial conditions Index (standard deviations from its historical value) Latin America ex-mexico Mexico Source: Itaú -10 Mar-07 Mar-09 Mar-11 Mar-13 Mar-15 Mar-17

9 LatAm: Our forecasts Peru Mexico GDP - % GDP - % PEN / USD (Dec) MXN / USD (Dec) Interest rates - (Dec) - % Interest rates - (Dec) - % IPC IPC Colombia Chile GDP - % GDP - % COP / USD (Dec) CLP / USD (Dec) Interest rates - (Dec) - % Interest rates - (Dec) - % IPC IPC Argentina GDP - % ARS / USD (Dec) Repo rate 7 days (eop) - % n/a IPC - % (Buenos Aires) Source: Itaú Unibanco

10 Brazil: What to expect in the short run Economic Activity GDP (%) Unemployment (%) December (PNAD cont.) Inflation CPI (%) Monetary Policy Selic Rate (%) Fiscal Primary Surplus (% GDP) Balance of Payments Exchange Rate (eop) Current Account (% GDP)

11 2013.I 2013.II 2013.III 2013.IV 2014.I 2014.II 2014.III 2014.IV 2015.I 2015.II 2015.III 2015.IV 2016.I 2016.II 2016.III 2016.IV 2017.I 2017.II 2017.III 2017.IV 2018.I 2018.II 2018.III 2018.IV Agricultural output set to ensure positive GDP growth in 1Q17 Industrial activity stagnated at the start of 2017; However, the significant increase in soybean and corn production compared with 2016 and the positive carryover from industrial output indicate positive GDP growth in 1Q17; Our 0.5% GDP growth forecast in the quarter will likely be revised upward soon as we incorporate recent data. We are maintaining our forecast of 1.0% growth in 2017 GDP and a 4.0% increase in Industrial Production Level sa 83 Level (SA) 82 QoQ (rhs) Average 4Q16 Average 1Q17 81 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Source: Itaú, IBGE QoQ 3% 2% 1% 0% -1% -2% -3% -4% -5% GDP growth QoQ sa 3,0% 2,0% 1,0% 0,0% -1,0% -2,0% -3,0% Actual Forecast -1,0% -2,2% -1,2% -0,9% 0,7% 1,1%

12 Economic recovery is likely to take longer to stabilize unemployment Formal job losses continue to slow. February saw net creation of 35.6 thousand formal jobs (according to figures from the payroll job report - Caged). Stripping out seasonal effects, the three month moving average improved to -35 thousand from -62 thousand; Despite better Caged numbers, the nation-wide unemployment rate rose to 13.2% in February, compared with 12.6% in January. Incorporating the recent job market dynamics, we have increased our unemployment forecast to 13.8% at the end of 2017 (previously 13.4%) and to 13.6% in the fourth quarter of Unemployment Rate %, seasonally adjusted ,8 5 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Formal job creation (CAGED) 3 month moving average, seasonally adjusted Source: IBGE, Itaú, FGV

13 Fiscal: focus on Social Security reform The government s original proposal would have had an impact on the federal government s primary result equivalent to 2.0 p.p. of GDP in 2025, compared with the scenario in which no reform is approved; However, the government has announced that rapporteur Arthur Maia s (PPS-BA) report will propose changes to five points in the original proposal. We believe Congress will approve the Social Security reforms, but their impact will amount to 1.2 p.p. of GDP, or 60% of the amount originally proposed by the government. 0,0% Social Security Expenses % of GDP -1,0% -2,0% -3,0% -3,3% -4,0% -5,0% -6,0% Social Security Result + BPC/LOAS Proposed Reform Expected reform Without reform -4,1% -5,3% Source: National Treasury, Itaú Source: National Treasury, Itaú

14 All-time high trade surplus in the first quarter The trade surplus marked an all-time high in the historical series (since 1992) in 1Q17. We have increased our trade surplus forecast for 2017 and This mainly reflects rising oil and fuel exports; We forecast a US$ 52 billion trade surplus in 2017 (previously US$ 49 billion) and US$ 37 billion surplus in 2018 (previously US$ 35 billion). However, the current account deficit will increase over the next several years; We continue to forecast an exchange rate of BRL 3.35 to the dollar at end 2017 and BRL 3.45 to the dollar at end US interest rates increases throughout the year and commodity prices drop from their current levels justify currency depreciation from current levels. Trade Surplus Year-to-date, billion dollars Exchange Rate BRL/USD, eop 4,50 4,00 3,50 3,35 3, ,00 2,50 2,00 3, ,50 Source: Itaú, BCB

15 We have reduced this year s inflation forecast to 3.9% This revision takes into account a reassessment of forecasts for food at home and industrial prices, amidst more favorable results on the margin, principally in the wholesale prices; On a disaggregated basis, we are forecasting a 3.4% rise in market prices (previously 3.7%) and a 5.3% increase in regulated prices (previously 5.5%) for 2017; Our 2018 inflation forecast remains stable at 3.8%. IPCA Breakdown YoY 20% 18% 16% 14% 12% IPCA Market-set prices (76%) Regulated prices (24%) 10% 8% 6.3% 6% 4% 3,9% Source: Itaú, IBGE 2% forecast 0% Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17

16 A faster pace of interest rate cuts for now At its April monetary policy meeting, the Central Bank cut interest rates by 1.0 p.p. reducing the Selic to 11.25%; In the statement accompanying its decision, the central bank signaled that the length of its monetary easing cycle will depend on estimates of structural interest rates in the Brazilian economy, but also on the behavior of economic activity, inflation forecasts and expectations and other risk factors; The statement also indicates that, for the moment, 100bps is the preferred pace of easing; We forecast the Selic rate at 8.25% by the end of 2017 and We expect one more 100-bp cut in May, two cuts of 75 bps (in July and September), and one cut of 50 bps (in October). 15% Selic % p.a. 14% 13% 12% 11% 10% 9% 11,25% 8,96% 9,88% 8% 8,25% 8,25% 7% Itau Unibanco Forecast Yield Curve Pricing Source: Itaú, Bloomberg

17 Conclusão Global Economy The global outlook remains favorable Global growth positive momentum continues, with a synchronized pick-up in activity indicators; In the U.S., a further disappointment with Trump administration s agenda poses limited risks to the economy and asset prices. We expect growth to pick-up in 2Q17; In Europe, all eyes are in the French election, which is an important short term risk for the global economy geopolitical tensions are also rising in the Middle East and Asia. Meanwhile, growth remains solid in the euro area; China outlook remains stable. Brazil Inflation continues to fall, Central Bank increases pace of easing GDP is likely to show positive growth in 1Q17, driven by high agricultural output; Congress will debate Social Security reforms in April. We expect the reforms to be approved in 3Q17; We have maintained our exchange rate forecast (BRL 3.35 to the dollar at end 2017 and BRL 3.45 to the dollar at end 2018); We have reduced our IPCA inflation projection for this year to 3.9% (from 4.1%). Our 2018 forecast is unchanged at 3.8%; The central bank increased the pace of interest rate cuts. We expect the Selic rate at 8.25% by the end of 2017 and 2018.

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