Brazil Economic Weekly

Transcription

1 Macroeconomic Research Department Macroeconomic Research Department Brazil Economic Weekly June 9 th 2017 Current indicators show weakened economic activity, leading us to adjust our GDP and inflation expectations The underwhelming performance of current economic indicators led us to revise our GDP forecast. We now expect GDP to remain flat for in 2017, and forecast 2.0% growth for This revision stems largely from our analysis of first-quarter data, which fell below expectations. Even though the GDP recorded a 1.0% growth on the margin, this result was almost entirely driven by the agricultural sector, while manufacturing and services remain sluggish. In addition, current data suggest that GDP is likely to shrink by 0.4% in the second quarter, raising questions about the degree to which the economy will recover in the second half. Sovereign risk spreads widened last month, which had an impact on the price of its currency. But the Central Bank s actions, a low level of external vulnerability, strong FX flows and a favorable external environment prevented a larger degree of depreciation. Overall, the external environment has been favorable to emerging countries currencies, which have benefited from a weaker US dollar. Therefore, we have revised our year-end exchange rate projection to BRL/USD 3.10 to BRL/USD 3.20 in 2017 and BRL/USD 3.25 to BRL/USD 3.30 in Our revised economic activity and exchange rate forecasts, combined with a new round of surprisingly low current inflation results, have led us to reassess our 2017 and 2018 inflation outlook once again. We now expect consumer inflation (IPCA) to come in at 3.4% and 4.0% in 2017 and 2018, respectively (against 3.7% and 4.1% in our previous forecasts). BRAZIL ECONOMIC WEEKLY Despite these adjustments, which take short-term results into account, we believe that keeping the current economic policy on course remains crucial to a gradual economic recovery. This disinflationary environment, with well-anchored expectations, will keep the interest-rate cutting cycle going throughout the second half, bringing the policy rate down to 8.00%. This will have a favorable impact on economic activity, which will gain strength going into Finally, we maintain our assessment that any further review of our scenario would be hasty at this point, given the uncertainties that persist in the shortterm environment. Global growth remains strong, but shows signs of a slight deceleration in the second quarter Global growth has remained strong in recent months, but we see some trends that point towards some deceleration in the second quarter. Not only has it been confirmed that the U.S. economy will grow less than 2% in the first half, but the Chinese and Latin American economies also show a gradual slowing trend. Europe has been the one region that shows a different dynamic at this time, continuing to provide positive growth surprises across most of its countries and economic sectors. While U.S. and Chinese growth forecasts dipped slightly in May, the outlook for Europe has been marginally improved. Going forward, we see some asymmetric risks for additional slowdown of activity, albeit spread over a longer horizon. Combined with improved inflation dynamics, this deceleration would slow the downward bias for global liquidity, as the world s leading economies are likely to keep their expansionary policies for a longer period. 1

2 Current indicators show weakened economic activity, leading us to adjust our GDP and inflation expectations The underwhelming performance of current economic indicators led us to revise our GDP forecast. We now expect GDP to remain flat in 2017, and forecast 2.0% growth for Our previous forecast called for 0.3% and 2.5% growth for 2017 and 2018, respectively. This revision stems largely from our analysis of first-quarter data, which fell below expectations. Even though the GDP recorded a 1.0% growth on the margin, this result was almost entirely driven by the agricultural sector, while manufacturing and services remain sluggish. In addition, current data suggest that GDP is likely to shrink by 0.4% in the second quarter, raising questions about the degree to which the economy will recover in the second half. It should be noted that we expected a stronger recovery by household consumption and investments than shown in the current data, considering several elements, such as improved confidence levels, falling interest rates and a significant deflationary trend, among others. 7,0 5,0 3,0 1,0 4,4 1,4 3,1 1,1 5,8 3,2 4,0 6,1 5,1 7,5 4,0 1,9 3,0 0,5 0,0 2,0 Chart 1: GDP (annual change, %) -1,0-0,1-3,0-5,0-3,8-3,6 Source: IBGE, Bradesco Brazil s sovereign risk spreads widened last month, which had an impact on the price of its currency. But the Central Bank s actions, a low level of external vulnerability, strong FX slows and a favorable external environment prevented a larger depreciation. The Central Bank auctioned traditional USD 10bn in traditional FX swaps. After being active for a few days, the Central Bank of Brazil left the market, but signaled it could return f necessary, not only through swap auctions, but also through buybacks and outright FX sales. The Brazilian currency held its ground, and even appreciated after sovereign spreads recovered moderately. Risk spreads were the most important driver for the FX market last week. Domestic Outlook ,9 Currency swap Liquidity reserves 62,0 15,3 2,8 101,1 3,3-12,9-19,4-23,1 207,5 11,8 284,9 0,0-11,5 372,4 10,8-4,9 75,1 370,8 114,9 108,1 May-02 Aug-02 Nov-02 Feb-03 May-03 Aug-03 Nov-03 Feb-04 May-04 Aug-04 Nov-04 Feb-05 May-05 Aug-05 Nov-05 Feb-06 May-06 Aug-06 Nov-06 Feb-07 May-07 Aug-07 Nov-07 Feb-08 May-08 Aug-08 Nov-08 Feb-09 May-09 Aug-09 Nov-09 Feb-10 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13 Nov-13 Feb-14 May-14 Aug-14 Nov-14 Feb-15 May-15 Aug-15 Nov-15 Feb-16 May-16 Aug-16 Nov-16 Feb-17 May-17 63,1 376,3 17,8 27,8 Chart 2: currency swap vs. liquidity reserves (USD billion) Source: BCB, Bradesco 2

3 In addition to a high volume of reserves, the low level of external vulnerability is reflected in two other factors: 1) low dependence on external financing 1, as FDI inflows amount to nearly four times the current account deficit; and 2) the improved composition of gross foreign liabilities. In the past few years, FDI inflows remained consistently high while other types of foreign liabilities declined. As a result, the stock of foreign direct investment, which is a long-term external liability, but denominated in local currency, increased its share in total external liabilities Current account deficit Foreign Direct Investment Chart 3: Foreign direct investment in Brazil and current transactions (USD million, 12-month running totals) Apr-96 Nov-96 Jun-97 Jan-98 Aug-98 Mar-99 Oct-99 May-00 Dec-00 Jul-01 Feb-02 Sep-02 Apr-03 Nov-03 Jun-04 Jan-05 Aug-05 Mar-06 Oct-06 May-07 Dec-07 Jul-08 Feb-09 Sep-09 Apr-10 Nov-10 Jun-11 Jan-12 Aug-12 Mar-13 Oct-13 May-14 Dec-14 Jul-15 Feb-16 Sep-16 Apr-17 Source: BCB, Bradesco In addition, the overall external environment has been favorable for emerging countries currencies, which have benefited from a weaker US dollar, despite the recent drop in commodity prices. Reduced political risks and improved economic activity across Europe, counterposed by increased political risk and frustrations with the U.S. economy, have intensified depreciation pressures on the U.S. dollar. We revised our forecast for the BRL in light of recent developments and current market levels, but believe that fundamentals do not support a significantly weaker exchange rate. We therefore revised our year-end exchange rate forecast from BRL/USD 3.10 to BRL/ USD 3.20 in 2017 and from BRL/USD 3.25 to BRL/ USD 3.30 in In light of the downward revision to our growth forecasts, we also revised our forecast for this year s trade surplus higher, to USD 62 billion (from USD 55 billion previously), while our forecast for the current account deficit dropped to USD 17 billion (from USD 25 billion). Domestic Outlook Our revised economic activity and exchange rate forecasts, combined with a new round of inflation surprises led us to reassess our 2017 and 2018 inflation. We now expect consumer inflation (measured by the IPCA) to come in at 3.4% and 4.0% in 2017 and 2018, respectively (against 3.7% and 4.1% previously). The moderate pick-up in economic activity continues to translate into a broader and consistent disinflationary process. In addition, the confirmation of a good agricultural harvest led to a positive supply shock for food prices. In fact, these prices have changed slightly less than we expected. Therefore, we have adjusted our food inflation forecast down to 0% (from 1.5% previously). We have also adjusted our forecast for consumer good prices, from +0.5% to -0.5%. For 2018, most of our inflation forecast revision was concentrated in the durable goods group, which went from +1.0% to 0%. To that end, we took into account the revised growth forecast for next year, below-expectations inflation and expectations remaining anchored. 1 Difference between direct investment in the country and current account deficit. 3

4 14,0% 12,0% 10,0% 12,5% 9,3% 10,7% Chart 4: Broad Consumer Price Index IPCA (year-over-year) 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 We maintained our forecast for the policy rate to end this year at 8.00% unchanged despite weaker growth and lower inflation. Although the minutes of the last Monetary Policy Committee (Copom) meeting emphasized that (i) the increase in uncertainties in the political environment may impact the reform agenda, with implications for the structural interest rate and (ii) these uncertainties may influence Copom s decisions, as they affect inflation expectations and the exchange rate trajectory, the committee stressed the importance of macroeconomic fundamentals economic activity and inflation on future monetary policy decisions. In other words, the committee will decide on the size and pace of interest rate cuts based on how the economy performs. Of course, just as the committee revealed that it is willing to reassess its outlook, we recognize that risks remain high and, therefore, we will be paying close attention to political and economic developments. 15,0% 14,0% 13,75% 13,00% 13,0% 12,0% 11,25% 11,0% 10,0% 9,0% 8,0% 7,0% 12,75% 11,75% 11,25% 10,75% 10,25% 9,50% 8,75% 12,50% 11,75% 11,00% 11,00% 10,00% 9,00% 8,50% 8,00% 7,25% 14,25% 13,25% 13,75% 12,25% 11,25% 10,25% 8,00% 8,00% Chart 5: Policy rate (Selic), % p.a. Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Source: BCB, Bradesco Domestic Outlook Finally, public finances data have confirmed our expectations that this year s primary deficit may be higher than the target, especially if the government fails to adopt any additional measures to bring it closer to the BRL 139 billion target. On the one hand, revenues continue to show a real decline of 1.9%, reflecting a still moderate economic activity. On the other hand, discretionary spending is still slightly above the seasonal average, despite a major effort to cut back on these expenditures. Nonetheless, we believe that the negative shock to the primary balance is due to lower government revenues, since the spending cap has already brought expenditures under control. Despite these adjustments, which take short-term results into account, we believe that keeping the current economic policy on course remains crucial to a gradual economic recovery. This disinflationary environment, with well-anchored expectations, will keep the interest-rate cutting cycle going throughout the second half, bringing the policy rate down to 8.00%. This will have a favorable impact on economic activity, which will gain strength going into Finally, we maintain our assessment that any further review of our scenario would be hasty at this point, given the uncertainties that persist in the short-term environment. 4

5 Policy Rate Selic* (% per year) Broad Consumer Price Index IPCA (% per year) GDP (% per year) Unemployment rate** (%) Exchange Rate (BRL/USD)* Current Account Balance (USD billion) Balance of Trade (BCB definition) (USD billion) Gross Debt (% of GDP) Summary table with the forecast of major economic variables (*) end of period (**) average for the period Source: Bradesco Domestic Outlook 5

6 Global growth remains strong, but shows signs of a slight deceleration in the second quarter Global growth has remained strong in recent months, but we see some trends that point towards some deceleration in the second quarter. Not only has it been confirmed that the U.S. economy will grow less than 2% in the first half, but the Chinese and Latin American economies also show a gradual slowing trend. Europe has been the one region that shows a different dynamic at this time, continuing to provide positive growth surprises across most of its countries and economic sectors. 59 Down vs. last 3 months EUROZONE Up vs. last 3 months BRAZIL DEVELOPED MKTS WORLD EMERGING MKTS Chart 1: Growth diffusion (change in PMI vs. 3-month average of PMI) LAST PMI READING SWITZERLAND UNITED STATES VIETNAM EMIRADOS ÁRABES TAIWAN CZECH REP. SAUDI ARABIA NORWAY NEW ZEALAND UNITED KINGDOM DEVELOPED MKTS CANADA PHILIPPINES NIGERIA WORLD BRAZIL POLAND EMERGING JAPAN MKTS MYANMAR RUSSIA INDIA MEXICO CHINA SOUTH AFRICA HONG KONG INDONESIA THAILAND KENYA LEBANON SOUTH KOREA EGYPT TURKEY DENMARK Contraction Expansion 45-3,0-2,0-1,0 0,0 1,0 2,0 3,0 4,0 LAST PMI READING MINUS AVG FOR LAST 3 MONTHS Source: Bloomberg, Bradesco Global Outlook As for the U.S. economy, after an underwhelming first quarter (with growth revised to 1.2%), there are still downward revisions to second-quarter GDP. While GDP growth forecasts were at 3% in April, they now range between 2% and 2.5%. Our current forecast is at 2.2% due to weak retail sales, belowexpectation automobile sales and the latest signs of a loss of momentum in investments, which were the main positive drivers for first-quarter GDP. Two other elements have contributed to this more modest growth outlook: (i) a gradual slowdown in the pace of job creation (the average for the last three months dropped to 121,000, below what we consider to be compatible with a stable unemployment rate); (ii) reduced pressure on prices and wages. Consumer inflation has slowed down sharply over the past two months (with core inflation rising 1.88%, below the FOMC target of 2.0%), and wages have risen 2.5% in the past 12 months. That pace has remained stable in the past few months, although it remains below the gradual acceleration that was expected for this low level of unemployment. In this regard, discussions about the current relationship between unemployment and wage dynamics, in light of increased evidence of a more horizontal Phillips curve, may regain relevance within the Federal Reserve. This debate brings a downward bias to our interest rate hike expectations for For now, we maintain our forecast of two more interest rate hikes in 2017 (in June and September), and three other increases throughout However, we recognize that more moderate 6

7 growth and inflation, should they last longer, could lead to a reassessment of the pace of U.S. policy normalization. The recent gridlock in Congress, which has kept President Trump s agenda from advancing, has contributed to this asymmetric risk scenario. Markets have increasingly absorbed these risks, with a significant reduction in the level of the interest rate embedded in the US government s medium-term bonds and the worldwide depreciation of the U.S. dollar. In fact, as shown in chart 2, there are less than two implicit interest rate hikes expected for this year, according to market prices. 3,00 2,50 2,46 2,76 2,70 Chart 2: number of implicit interest rate hikes in 2017 (U.S.) 2,00 1,78 1,96 1,76 1,50 1,51 1,00 0,85 1,18 1,17 0,50 0,48 0,56 0,00 20/09/16 25/09/16 30/09/16 05/10/16 10/10/16 15/10/16 20/10/16 25/10/16 30/10/16 04/11/16 09/11/16 14/11/16 19/11/16 24/11/16 29/11/16 04/12/16 09/12/16 14/12/16 19/12/16 24/12/16 29/12/16 03/01/17 08/01/17 13/01/17 18/01/17 23/01/17 28/01/17 02/02/17 07/02/17 12/02/17 17/02/17 22/02/17 27/02/17 04/03/17 09/03/17 14/03/17 19/03/17 24/03/17 29/03/17 03/04/17 08/04/17 13/04/17 18/04/17 23/04/17 28/04/17 03/05/17 08/05/17 13/05/17 18/05/17 23/05/17 28/05/17 02/06/17 07/06/17 Source: Bloomberg, Bradesco After robust growth in the first quarter, the Chinese economy is also expected to slow down slightly in the second quarter. This loss of pace is due to adjustments in monetary policy which is currently focused on controlling financial risks, reducing system liquidity and increasing the regulation of transactions outside the financial system. In addition, the government has adopted restrictive measures for the housing sector in response to an overheated market that led to a surge in housing prices. The move paid off, as property sales have started to drop and investments are slowing down, as shown in chart 3. From now on, we believe that prices will continue to slow down, but remain compatible with the current GDP growth target of 6.5% (or slightly above). 55,0% 45,0% 35,0% Infrastructure Manufacturing Real estate Chart 3: investments in urban properties (quarterly change, yearover-year) 25,0% 15,0% 17,1% 5,0% 5,1% 4,9% -5,0% Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Source: Eurostat, Bradesco Global Outlook In any case, there is an asymmetrical risk in a scenario in which the economy slows down more than expected by the market due to the policy changes mentioned above. Monetary policy adjustments aimed at reducing financial risks have led to tight liquidity and correction of interbank rates which may once again raise concerns about the Chinese financial system s health and sustainability. Finally, the Chinese currency has appreciated over the past few weeks, especially against the U.S. 7

8 dollar. China s central bank has recently changed its formation mechanism for the daily exchange rate. This new intervention format appears to have added some degree of market volatility in the short term, and part of that appreciation may be a response to the devaluation of the dollar so far in 2017, since the renminbi had been stable so far. The latest activity data from the Eurozone suggests consistent growth across its member nations. The PMI index for May remained high at 56.8 points, led by the manufacturing sector, which rose 0.3 points compared to April. European Central Bank (ECB) governor Mario Draghi acknowledged this more positive economic environment, as he stated that the risk factors for the region s growth have decreased and revised the bank s 2017 growth forecast for the Eurozone from 1.8% to 1.9%. Despite a more benign scenario, with the risk of deflation no longer a threat, inflation remains at low levels. Therefore, European monetary policy is likely to stay on course, without any changes to interest rates or to the bond purchase program in For the medium term, the more moderate growth of the global economy is expected to keep the EU s expansion on hold, since part of the ongoing recovery is based on foreign trade. Europe remains the region with the most positive surprises when it comes to economic activity, with improvement increasingly spreading among different countries and economic sectors. Therefore, while U.S. and Chinese growth forecasts dipped slightly in May, the outlook for Europe improved marginally. Going forward, we see some asymmetric risks for additional slowdown of activity, albeit spread over a longer horizon. Combined with improved inflation dynamics, this deceleration would slow the downward bias for global liquidity, as the world s leading economies are likely to keep their expansionary policies for a longer period. Bradesco Macroeconomic Forescast 8

9 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 6,553 7,033 GDP (US$ billion) 1,695 1,668 2,207 2,611 2,459 2,463 2,455 1,800 1,795 2,060 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 9,920 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 June 9 th (*) Forecast. na = not available. Source: Official figures Production and forecasts(*): BRADESCO 9

10 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/ Bruno Sanchez Honório / Christian Frederico M. Moraes / Felipe Alves Fêo Emery de Carvalho / Felipe Yamamoto Ricardo da Silva / 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. 10