Economic Outlook. Macroeconomic Research Itaú Unibanco

Transcription

1 Economic Outlook Macroeconomic Research Itaú Unibanco March 2015

2 Overview International Global growth on the rise. U.S. interest rates will soon follow U.S. economic fundamentals remain solid. Rates are likely to go up in June or September. Better signals from Europe; consumption and investment are leading the recovery. China continues to decelerate despite room for additional economic stimuli. Brazil Worsening prospects Worse conditions for the current account deficit require a faster adjustment, bringing the exchange rate to weaker levels. Political headwinds, which are hindering the implementation of some measures, and the contraction in economic activity affect our primary surplus forecast. Economic activity remains on a worsening trend, lowering our growth forecast. We expect a 1.1% GDP contraction this year and a 1.1% rebound in A larger adjustment in electricity tariffs and weaker currency will pressure this year s inflation. IPCA is expected to rise 8.0% in 2015 and 5.5% in The tightening cycle is set to continue, and the Selic rate is likely to end at 13% in

3 Scenario of Higher Growth in World USA Euro Zone Japan China Source: Itaú Unibanco, Haver Analytics, Bloomberg 3

4 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 U.S.: Fundamentals Remain Solid The recent slowdown seems transitory, the result of a harsh winter and port strikes on the West Coast. Fundamentals remain solid. The labor market continues robust: Non-farm payrolls rose by 295 thousand in February and unemployment declined to 5.5%, a level close to full employment. We expect the GDP to grow 2.9% in 2015 and 2.5% in Non-Farm Payroll Thousand, 12-month average 280 GDP Real Growth annualized rate 5.5% % 3.5% 2.5% 2.4% 2.9% 2.5% 1.5% % % -1.5% % 160 Feb-12 Aug-12 Feb-13 Aug-13 Feb-14 Aug-14 Feb-15 Source: Itaú Unibanco, BEA, Haver Analytics, BLS QoQ Annual 4

5 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Countdown to Interest Rate Hike As gasoline prices stabilize, after a 40% decline between June 2014 and January 2015, inflation is expected to turn positive from February onward. FOMC members have stated that the interest rate will increase once they are reasonably confident that inflation will move towards to 2%. This stance keeps the Fed on track to start increasing the Fed fund rates in June or September. Core PCE YoY change 2.5% 2.0% Federal Funds % p.a. 2.7% 2.2% 1.7% Itaú Fomc Yield Curve Dec/ Dec/ % 1.2% 0.7% 1.0% 0.2% -0.3% 0.5% Itaú Fomc Yield curve Source: Itaú Unibanco,Bloomberg, Haver Analytics, BLS 5

6 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 Europe: Economic Activity Continues Improving In the last quarter of 2014, GDP expanded 0.3% QoQ, boosted by consumption (0.4%) and investment (0.4%). February s aggregated PMI reached 53.3, higher than January s 52.6 figure. The weaker euro, lower oil prices and declining interest rates support the growth pace. We expect GDP to grow 1.4% this year and 1.8% in GDP Real Growth % 2.5% Exchange Rate USD/EUR % 1.8% % 1.4% % 0.9% % % % % 1.15 QoQ Annual Source: Itaú Unibanco, Bloomberg, Haver Analytics, Eurostat 1.10 Feb-11 Jun-12 Oct-13 Feb-15 6

7 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 China: Higher Stimuli Is Necessary to Avoid a Sharper Slowdown Recent data suggests that growth continues on a downward trend: Manufacturing PMI is below 50 since January. In response, the PBoC lowered its benchmark lending and deposit rates. We believe that more stimulus is need to prevent a shaper slowdown, and we forecast 6.9% GDP growth in 2015 and 6.6% in Manufacturing PMI Higher than 50 indicates expansion GDP Real Growth %, annualized rate 10.0% 9.5% 9.0% 8.5% % 7.5% 7.0% 6.5% 6.0% 5.5% 7.5% 6.9% 6.6% QoQ Annual Source: Itaú Unibanco, Haver Analytics, NBS, Bloomberg 7

8 Commodities: Partial Recovery of Oil Prices Commodity prices have been roughly stable since early February, and Brent prices reached USD 61/bbl. Metal prices have remained on a downward trend, and agricultural prices continued declining, driven by lower sugar, coffee and wheat prices. Our scenario assumes that Itaú Commodities Index will rise 14.3% from current levels in 2015 and 3.4% in Itaú Commodities Index 2008= Source: Itaú Unibanco, Bloomberg 8

9 Latin America: Mixed Performance in 2015 Although the Mexican economy performed well in 4Q14, recent indicators suggest a loss of momentum. Peruvian economy slowed in 2014 due to supply shocks (fishing and mining sectors) and contraction in investment. In Colombia, consumption still sustains growth. Activity indicators for January reaffirmed that a gradual economic recovery in Chile is underway. Higher inflation and the outlook for further depreciation in the peso have led the Chilean central bank to close the door on new cuts in the interest rate. In Colombia, authorities signaled that rate cuts are unlikely in the short term. In Peru, easing via lower reserve requirements continues, but the signal is that monetary loosening may be near an end. Even in Mexico, where inflation is better behaved and the recovery is still slow, the Banxico has signaled hikes in interest rates. In Latin America, falling commodity prices and weaker currencies the latter putting pressure on inflation reduce the room for further economic stimulus and hold back the recovery. Lower oil prices have weighed on public accounts in Colombia and Mexico, producing some fiscal tightening. In Argentina, political change looks more likely. Market-friendly opposition candidate Mauricio Macri is leading in the electoral polls (albeit by a small margin), increasing the chances of orthodox adjustments in the economy. We now expect tougher adjustments in

10 Latin America: Mixed Performance in 2015 Peru Mexico GDP - % GDP - % PEN / USD (Dec) MXN / USD (Dec) Interest Rate- (Dec) - % Interest Rate - (Dec) - % CPI CPI Colombia Chile GDP - % GDP - % COP / USD (Dec) CLP / USD (Dec) Interest Rate - (Dec) - % Interest Rate - (Dec) - % CPI CPI Argentina GDP - % ARS / USD (Dec) BADLAR - (YE) - % CPI - % (Private Estimatives) Source: Itaú Unibanco 10

11 Brazil: What to Expect in the Short Run? Economic Activity GDP (%) Unemployment (%) - December Inflation IPCA (%) Monetary Policy Selic Rate (%) Fiscal Primary Surplus (% GDP) Balance of Payments Exchange Rate (eop) Current Account (% GDP)

12 External Sector: Weaker Currency and High Volatility The exchange rate is likely to weaken at a faster pace this year due to thin international liquidity, heftier payments on external debt, a more complex political scenario and the recent signals of BCB s intention to interrupt its intervention in the currency market. An overshooting is likely to happen throughout 2015, but the exchange rate is likely to end close to 3.10 BRL/USD by the of the year. In 2016, we expect the exchange rate to reach 3.40 BRL/USD. This dynamics is likely to adjust the current account at a faster pace. The current account deficit is set to decline to 3.7% of GDP at the end of 2015 and 3.3% in Exchange Rate BRL/USD Current Account Deficit % of GDP 4.0% 2.5% 4.2% 3.7% 3.3% % % Aug-09 Jun-11 Apr-13 Feb-15 Dec % Source: Itaú Unibanco, BCB 12

13 Fiscal Policy: Good Start in January, Challenging Scenario Ahead The consolidated primary budget surplus totaled 21.1 billion reais in January, reinforcing government efforts to reverse the recent trend of fiscal deterioration. However, the prospects of approving further measures in Congress are becoming less favorable. After incorporating the effect of a greater decline in economic activity on government revenues and lower gains from the recent measures, we decided to lower our primary surplus estimates: 0.9% of GDP in 2015 and 1.8% in How to increase the primary surplus in 2015 (from -0.6% to 0.9%) Already announced? BRL bn % GDP REVENUE ADJUSTMENT % Hike in Cide and PIS/Cofins (fuel tax) Yes % Hike in IPI (tax on manufactured goods) Yes 7 0.1% Hike in IOF Tax on Household Bank Loans Yes 7 0.1% Partial reversion of the payroll tax break Yes* 2 0.0% Lower rate for the REINTEGRA program Yes 1 0.0% Decline in Royalty Revenues % Decline in Non-recurrent revenues % Inflation effect % Effect of declining real GDP % EXPENDITURE ADJUSTMENT % Cut in unemployment insurance, low-wagers bonuses Yes* % Cut in pensions and health assistantships Yes* 2 0.0% Cut in Administrative Costs % Cut in Investment % Cut in electricity subsidies Yes 8 0.1% Hike in Minimum Wage and Social Security Beneficiaries % Subsidies to the BNDES Investment Program % Increase in Payroll Expenditures % ADJUSTMENT IN REGIONAL BUDGETS % ADJUSTMENT IN STATE-OWNED COMPANIES 5 0.1% TOTAL NET ADJUSTMENT % Source: Revenue Service, National Treasury, Itaú * Still pending Congress Approval 13

14 Economic Activity: Deterioration Continues... Recent data showed an overall deterioration in the economic activity: our diffusion index remained at low levels in February. Industrial production remains weak despite the increase in January, and in the retail segment, vehicle sales contracted in February, and vehicle inventories are still high at manufacturers and dealerships. Itaú Diffusion Index ratio of activity indexes that increased on MoM change 85% FGV Inventory Index Surveyed reporting excessive surveyed reporting insufficient 25.0% 75% 65% 55% 45% 20.0% 15.0% 10.0% 35% 5.0% 25% 15% Jan-08 Jun-09 Nov-10 Apr-12 Sep-13 Feb-15 Difusion index Average Source: Itaú Unibanco, IBGE 0.0% -5.0% Jan-08 Jun-09 Nov-10 Apr-12 Sep-13 Feb-15 14

15 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16... And 2015 Forecasts Get Worse Business confidence levels fell in February in all the major economic sectors, and uncertainties in the domestic scenario are increasingly being reflected in economic agents expectations. The widespread economic and political uncertainty, tariff shocks (e.g., electricity) and ongoing monetary and fiscal adjustments led us to reduce our GDP growth forecasts: -1.1% in 2015 and 1.1% growth in Confidence Indexes July/2010 = 100 GDP Real Growth % Aug-10 May-11 Feb-12 Nov-12 Aug-13 May-14 Feb % 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% -1.0% -1.5% 0.0% -1.1% 1.1% Industrial Services Retail Construction QoQ Annual Source: Itaú Unibanco, IBGE, FGV 15

16 Unemployment Rate Keeps Rising In January, Caged data (Ministry of Employment) indicated a net destruction of almost 50 thousand jobs, and the unemployment rate increased to 5.3% (both after seasonal adjustment). We increase our projection for the unemployment rate, from 6.3% to 6.6% by the end of Formal Job Creation In thousands, seasonally adjusted 300 Unemployment Rate and Hard-to-Get-a-Job Indicator %, seasonal adjusted 85% 8.5% % 7.5% % 55% 45% 6.5% 5.5% % 4.5% Nov-08 Feb-10 May-11 Aug-12 Nov-13 Feb-15 Hard to get a job (% of answers) Unemployment (rhs) Source: Itaú Unibanco, IBGE, Caged, FGV 16

17 Electricity: Expectations of Lower Consumption The evolution was better than in January but insufficient to fully offset the hydrologic deficit accrued early in the rainy season. Reservoir levels rose, but the risk of a shortage is still high. Lower consumption may prevent power rationing. Electricity consumption is likely to decline due to rising electricity tariffs, slower economic growth and campaigns to encourage less power usage. Aggregate Reservoir Levels % of total capacity Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Average * Source: Itaú Unibanco, ONS 17

18 IPCA: Pressures From the Regulated-Price Readjustment and Weaker Exchange Rate IPCA is likely to rise 8.0% in 2015, a result of a 13.1% hike in regulated prices (increase of 50% in the electricity tariffs) and 6.5% increase in market-set prices, reflecting a weaker exchange rate. For 2016, we kept our forecast of 5.5% for market-set prices, regulated prices and overall IPCA. The weaker exchange rate is a risk factor, as it could have a lagging effect on some regulated prices. On the other hand, slowing activity may pull inflation down to lower-than-expected levels next year. IPCA Breakdown YoY change Regulated-Price Readjustment YoY increase 14% 12% 10% 8% 13.1% 8.0% Gasoline 2.9% 9.8% 6.0% Electricity Tariffs 17.1% 50.0% 4.5% Urban Bus Fares 3.9% 12.5% 5.0% Water & Sewage Tariffs -2.7% 9.4% 13.0% 6% 4% 6.5% 5.5% Others 4.8% 5.8% 4.8% Regulated prices 5.3% 13.1% 5.5% 2% 0% Jan-14 Jun-14Nov-14Apr-15 Sep-15Feb-16 Jul-16 Dec-16 IPCA Market-set Regulated Source: Itaú Unibanco, IBGE 18

19 Tightening Cycle Close to an End, Provided the Exchange Rate Stabilizes The Copom released the minutes of its last meeting, when it increased the Selic rate by 50 bps. In the document, the Copom recognized that inflation will be higher in 2015 but maintained the scenario of convergence to the target in We believe the tightening cycle is near completion, depending on the exchange rate. We project a final hike of 25 bps in April, driving the Selic rate to 13%. Selic Rate % p.a 15% 14.41% 14% 13% 12% 13.00% 11% 10% 9% 8% 7% Itaú Unibanco forecast Yield curve pricing Source: Itaú Unibanco, Bloomberg 19

20 Conclusions International Global growth on the rise. U.S. interest rates will soon follow U.S. economic fundamentals remain solid. Rates are likely to go up in June or September. Better signals from Europe; consumption and investment are leading the recovery. China continues to decelerate despite room for additional economic stimuli. Brazil Worsening prospects Worse conditions for the current account deficit require a faster adjustment, bringing the exchange rate to weaker levels. Political headwinds, which are hindering the implementation of some measures, and the contraction in economic activity affect our primary surplus forecast. Economic activity remains on a worsening trend, lowering our growth forecast. We expect a 1.1% GDP contraction this year and a 1.1% rebound in A larger adjustment in electricity tariffs and weaker currency will pressure this year s inflation. IPCA is expected to rise 8.0% in 2015 and 5.5% in The tightening cycle is set to continue, and the Selic rate is likely to end at 13% in