Brazil Economic Weekly

Transcription

1 Macroeconomic Research Department Macroeconomic Research Department Brazil Economic Weekly June 23 rd 2017 Regional trends reinforce our benign outlook for consumer inflation Leandro Câmara Negrão An important aspect of Brazil s inflation slowdown over the past few quarters has been the fact that it has been spread across several components. While a record grains harvest has helped push food prices down, there has also been a significant slowdown in the price of services and durable goods. These positive developments continue to respond to a high level of slack in the economy and to the credibility of the government s economic policies, which have kept inflation expectations well-anchored in every forecast horizon. The trend has been equally widespread across the country s regions, as inflation continued to slow down in the first quarter and the dipped below the center of the target (4.5%). Some of the lowest IPCA rates were recorded in the cities of Curitiba (Paraná), Belo Horizonte (Minas Gerais) and Salvador (Bahia). One exception is Recife, the capital of Pernambuco State, where specific local conditions have kept prices pressured, with the IPCA still above target and on an accelerating trend in recent months. These regional analyses allow us to more confidently state that the disinflation trend has been widespread across all regions. With the exception of Recife, where electricity rates went up more than in any other regions, most state capitals have been posting benign inflation figures. In addition, when comparing the current inflation trend with recent periods marked by high (2015), slowing (2016) and low (2006) inflation, we find that the present scenario is more similar to 2006, when the IPCA for the year was 3.1%. These vectors reinforce our favorable inflation outlook, given our year-end IPCA forecasts of 3.4% (2017) and 4.0% (2018). Echoing the forecasts released this week in June s Quarterly Inflation Report (RTI), we reinforce our outlook that the Selic policy rate will end the year at 8.0%. BRAZIL ECONOMIC WEEKLY Revisiting the short-term risks for the Chinese economy: liquidity, housing sector and capital outflow Fabiana D Atri The Chinese economy gave signs of stabilizing in May, as confirmed by several recent indicators. The good news came in the wake of underwhelming data from April, which in turn were preceded by positive surprises for a few consecutive quarters that resulted in upward adjustments to the country s growth forecasts. Nevertheless, some adjustments have already been made to key growth vectors that had been of little concern until now. The past few months have seen major adjustments to the financial system s liquidity, housing sector policies and currency formation mechanism. We maintain our positive outlook for China this year, placing low probability on extreme events, but it would prudent to reassess shortterm risk, which could bring uncertainties to global markets. We maintain our assessment that the Chinese economy will continue to slow down over the next few quarters. However, we expect it to be a moderate and controlled slowdown, which should be good enough to keep growth at a minimum of 6.5% in Even though the government has adjusted some of its policies, we should not forget that a political transition is set to take place this October. Economic stability is seen as extremely important to guarantee a seamless and successful transition, as most of the Party s top leadership positions change hands. 1

2 Regional trends reinforce our benign outlook for consumer inflation Leandro Câmara Negrão An important aspect of Brazil s inflation slowdown over the past few quarters has been the fact that it has been spread across several components. While a record grains harvest has helped push food prices down, there has also been a significant slowdown in the price of services and durable goods. These positive developments continue to respond to a high level of slack in the economy and to the credibility of the government s economic policies, which have kept inflation expectations well-anchored in every forecast horizon. The trend has been equally widespread across the country s regions, as inflation continued to slow down in the first quarter and the dipped below the center of the target (4.5%). The data reinforce our benign consumer inflation outlook for 2017 and Some of the lowest IPCA rates were recorded in the cities of Curitiba (Paraná), Belo Horizonte (Minas Gerais) and Salvador (Bahia). One exception is Recife, the capital of Pernambuco State, where specific local conditions have kept prices pressured, with the IPCA still above target and on an accelerating trend in recent months. IPCA (3-month minus ) 4,5% 3,5% 3,0% 2,5% 1,5% 1,0% 0,5% São Paulo - SP Recife - PE -0,5% Goiânia - GO -1,0% Brazil -1,5% Porto Alegre - RS Curitiba - PR - -2,5% -3,0% Belém - PA -3,5% Salvador - BA Campo Grande - MS - -4,5% Benign inflation (below target and slowing down) Belo Horizonte - MG -5,0% 0,5% 1,0% 1,5% 2,5% 3,0% 3,5% 4,5% 5,0% 5,5% 6,0% 6,5% 7,0% 7,5% 8,0% 8,5% 9,0% Chart 1 Regional Broad Consumer Price Index (IPCA) Through May 2017 Domestic Outlook When we break down this regional trend a little further, we will see that two vectors explain the difference between price behavior in Recife and other regions around Brazil: i) regulated prices, which have been pressured by the 24% hike in electricity rates in May (which is 15 p.p. above the average of other regions, where rates went up 8.7% on average); and ii) service prices, which saw an accumulated increase of 5.8% over the past 12 months and have been accelerating over the last three months. On the other hand, the favorable inflation trends seen in Belo Horizonte, Curitiba and Salvador are closely related to lower food prices. These cities have recorded the lowest inflation rates in Brazil over the past twelve months, and that trend has kept steady over the past quarter. The following charts show the seasonally adjusted annual inflation for the last 12 and 3 months, in the 13 regions surveyed by the Brazilian Institute of Geography and Statistics (IBGE) for its Broad Consumer Price Index (IPCA), broken down into some of the key components: food at home, services and regulated prices. In addition to the components mentioned above, the inflation trend for durable goods is also worth noting. These prices have been kept in check in nearly all reporting regions, with the 12-month IPCA staying below the target and decelerating over the last 12 months. 2

3 IPCA (3-month minus ) 6,5% 4,5% 2,5% 0,5% -1,5% -3,5% -5,5% -7,5% -9,5% São Paulo - SP Rio de Janeiro - RJ Brazil Salvador - BA Porto Alegre - RS Recife - PE Belo Horizonte - MG Campo Grande - MS Brasília - DF Belém - PA Curitiba - PR Goiânia - GO Fortaleza - CE Chart 2 Regional Broad Food at Home Through May ,5% Benign inflation (below target and slowing down) Grande Vitória - ES -13,5% -3,5% -2,5% -1,5% -0,5% 0,5% 1,5% 2,5% 3,5% 4,5% 5,5% 6,5% 7,5% 8,5% 9,5% Chart 3 Regional Broad Services Through May 2017 IPCA (3-month minus ) 5,0% 3,0% 1,0% -1,0% Belém - PA São Paulo - SP Curitiba - PR Goiânia - GO Recife - PE Rio de Janeiro - RJ Brazil Grande Vitória - ES Porto Alegre - RS Fortaleza - CE - Salvador - BA -3,0% Benign inflation Belo Horizonte - MG (below target and slowing down) - 3,0% 3,5% 4,5% 5,0% 5,5% 6,0% 6,5% IPCA (3-month minus ) 6,0% - - Goiânia - GO Curitiba - PR São Paulo - SP Brazil Belo Horizonte - MG Rio de Janeiro - RJ Fortaleza - CE Brasília - DF Campo Grande - MS -6,0% Salvador - BA Recife - PE Benign inflation (below target and slowing down) Porto Alegre - RS -8,0% -5,0% - -3,0% - -1,0% 1,0% 3,0% 5,0% 6,0% 7,0% 8,0% 9,0% 1 11,0% 1 Chart 4 Regional Broad Durable Goods Through May 2017 Domestic Outlook Chart 5 Regional Broad Consumer Price Index (IPCA) Regulated Prices Through May 2017 IPCA (3-month minus ) 1 8,0% 6,0% ,0% Porto Alegre - RS Belém - PA Goiânia - GO Curitiba - PR Grande Vitória - ES Brazil Brasília - DF Rio de Janeiro - RJ São Paulo - SP Campo Grande - MS Fortaleza - CE Salvador - BA Recife - PE -8,0% Benign inflation Belo Horizonte - MG (below target and slowing down) ,0% 1,0% 3,0% 5,0% 6,0% 7,0% 8,0% 9,0% 1 11,0% 1 3

4 Reinforcing the widespread slowdown of inflation across the different regions, we compare the current scenario with higher-inflation periods, such as 2015 and In 2015, we see a concentration in the pressured inflation, with all regions seeing abovetarget and accelerating inflation. In 2016, on the other hand, we start to see the widespread slowdown of inflation and most of the regions falling in the slowing inflation quadrant. Extending the comparison to 2006, when the IPCA index ended the year at 3.1%, we see that the current disinflation trend is more evenly widespread across different regions. 1 IPCA (3-month minus ) 5,0% 3,0% 1,0% -1,0% - -3,0% Chart 6 Regional Broad Benign inflation (below target and slowing down) -5,0% -5,0% -3,0% -1,0% 1,0% 3,0% 5,0% 7,0% 9,0% 11,0% 13,0% 15,0% Chart 7 Regional Broad 2016 IPCA (3-month minus ) 1 8,0% 6,0% ,0% -8,0% Benign inflation (below target and slowing down) -1 1,0% 3,0% 5,0% 6,0% 7,0% 8,0% 9,0% IPCA (3-month minus ) 1 8,0% 6,0% ,0% Chart 8 Regional Broad 2006 Domestic Outlook -8,0% Benign inflation (below target and slowing down) -1 2,5% 3,0% 3,5% 4,5% 5,0% 5,5% 6,0% 6,5% These exercises allow us to more confidently state that the disinflation trend has been widespread across all regions. With the exception of Recife, where electricity rates went up more than in any other regions, most state capitals have been posting benign inflation figures. In addition, when we comparing the current trend with recent periods marked by high (2015), slowing (2016) and low (2006) 1 Since we are witnessing a similar disinflation scenario, the chart for this year considers the same period we are analyzing in 2017 (IPCA through May). 4

5 inflation, we find that the present scenario is more similar to 2006, when the IPCA for the year was 3.1%. These vectors reinforce our favorable inflation outlook, given our year-end IPCA forecasts of 3.4% (2017) and 4.0% (2018). Echoing the forecasts contained in June s Quarterly Inflation Report (RTI), which was released this past week, we reinforce our outlook that the Selic policy rate will end the year at 8.0% ,5% 10,7% Chart 8 - Broad Consumer Price Index (IPCA) YoY 1 9,3% 8,0% 7,7% 7,6% 6,0% 5,7% 5,9% 5,9% 6,5% 5,8% 5,9% 6,4% 6,3% 3,1% 4,5% 4,3% 3,4% Domestic Outlook * 2018* 5

6 Revisiting the short-term risks for the Chinese economy: liquidity, housing sector and capital outflow Fabiana D Atri The Chinese economy gave signs of stabilizing in May, as confirmed by several recent indicators. The good news came in the wake of underwhelming data from April, which in turn were preceded by positive surprises for a few consecutive quarters that resulted in upward adjustments to the country s growth forecasts. Nevertheless, some adjustments that are key growth vectors were made recently. The past few months have seen major adjustments to the financial system s liquidity, housing sector policies and currency formation mechanism. We maintain our positive outlook for China this year, placing low probability on extreme events, but it would prudent to reassess short-term risk, which could bring uncertainties to global markets. Following the strong growth recorded in the first quarter and a generalized deceleration in April, the Chinese economy stabilized in May. Secondquarter growth is now expected to come in at slightly over 6.5%, down from the pace of 6.9% recorded from January through March. The following table highlights some of last month s numbers that indicate a controlled and gradual growth deceleration. It shows the growth rates for the last two quarters and the partial results for the current quarter (April and May), considering the year-over-year comparisons. The table also shows the performance of the credit market. In our view, the credit market remains expansionary when considering the current level of growth, given volume of loans granted, the increase in the share of transactions by banks when compared to non-banking institutions (shadow banking), and the growth of loans granted to individuals. However, there is considerable evidence pointing towards a moderation and to the loss of share to non-banking institutions. Year-over-Year change / Volume in RMB 4th quarter st quarter 2017 April-May 2017 Industrial production (yoy) 6.00% 7.60% 6.50% Fixed asset investments (yoy) 8.10% 9.20% 8.60% Retail sales (yoy) 10.90% 10.90% 10.70% Electric power generation (yoy) 8.60% 8.20% 6.90% Car sales (yoy) 15.00% 7.40% -0.80% Railway cargo volume (yoy) -2.30% 15.20% 14.60% New home sales (yoy) 22.30% 16.90% 11.80% Exports (yoy) -5.30% 8.20% 8.30% Imports (yoy) 2.70% 24.10% 13.40% Table 1 select economic indicators Loans granted by banking institutions (in RMB billion) 2, , , Loans granted by non-banking institutions (in RMB billion) 1, , Global Outlook Bank loans/total loans (%) 41% 88% 95% Loans to individuals (yoy) 67.50% 45.60% 12.60% Source: Bloomberg, CEIC, Bradesco 6

7 Even though these indicators reflect a moderate slowdown, the government has been fine-tuning some of its key economic policies since March. Some of the adjustments include a two-pronged approach to changing the monetary policy, in an attempt to keep financial risks in check and strengthen the financial system. After strong growth in 2016, the Central Bank has reduced liquidity through open market operations and by making new credit lines available to financial institutions. Chart 1 below shows this reduction over the last few months, considering all the credit lines currently provided by the Central Bank. On June 16, the Central Bank used open market operations increased the supply of credit, largely motivated by the Fed s decision to raise interest rates in the U.S. However, some of them were already removed from the market this past week. At the same time, the country s regulatory agencies have imposed a wide range of restrictions on financial institutions, especially non-banks (the so-called shadow banking sector). These two changes have been putting pressure on interbank market costs, increasing the level and volatility of rates, as shown in chart 2, which shows the return on government bonds. In fact, the reduction in non-bank credit supply is a sign that the tightening measures applied on the interbank market have compromised these institutions making room operations on the banking system , , Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Chart 1 China: net liquidity injection by the Central Bank (open market operations and short- and medium-term credit lines), in RMB million Note: For June 2017, we considered the preliminary result of open market operations held through 6/23/2017. Source: CEIC, Bradesco Chart 2 Interest rates: return on government bonds 5,0 4,5 4,0 3,5 3,0 4,728 3,093 3,717 1-year 10-year 3,043 5-year 3,520 3,544 3,522 3,531 2,5 2,700 2,02,193 1,5 1,660 Source: CEIC, Bradesco 22/06/ /09/ /12/ /03/ /06/ /09/ /12/ /03/ /06/ /09/ /12/ /03/ /06/ /09/ /12/ /03/ /06/ /09/ /12/ /03/ /06/2017 Global Outlook For now, our assessment is that stress risks to the financial system are low and that the increased cost of capital has been limited when compared to other periods for the Chinese economy. Likewise, the amount of credit available to the economy remains positive, not being a source of contraction. Even so, it is important to monitor Central Bank steps, which recently called for greater cooperation between regulatory bodies while alleging that the impacts of these policies needed to be scrutinized more closely in order to stabilize market expectations. That is, the risk that a sudden and excessive tightening may be under way has been generally acknowledge, which may jeopardize growth in the quarters ahead leading us to expect some relief in the coming months. 1 While, on the one hand, we expect to see a gradual decrease in the tightening of monetary conditions, the government should continue to impose restrictive measures on the housing sector which 1 Even more so at the end of the quarter, when there is a concentration of tax payments and the need to meet new regulatory requirements, such as greater controls on loan collaterals and increased reporting demands for wealth management products. 7

8 is one of the main determinants for the Chinese economy s growth cycle. It is worth noting that, since last year with the recovery in the the sector which started with improved sales and then moved on to new starts, investments and land sales new property prices have risen significantly. As a result, several cities have announced restrictive measures to limit purchases and financing for new apartments, in an attempt to prevent a new bubble in the sector. Therefore, home sales started to slow down and prices have been dropping since March, as shown in the two charts below. Based on a sample size of 70 cities, we can see that prices have been falling on a monthly basis for most of them. We understand that there is a lag between sales, new starts and construction. As a result, most of the impact on the economy will be felt in late 2017/early However, investments are already losing momentum and the expectations have impacted other markets especially the price of metal commodities, which have been dropping since March. Reflecting this scenario and other supply-related factors, iron ore prices fell from a peak of almost USD 95/ton in March to current levels closer to USD 55/ton ,6% 35,2% Sales News Starts Investments 40% 30% Chart 3 China: new residential property market (12-month change) 3 1 7,6% 25,3% 6,6% 26,9% 23,6% 20% 10,3% 10,6% -1-6,3% -10,8% -16,0% 10% 5,5% 6,3% -3 1,8% 0% 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 Source: CEIC, Bradesco Chart 4 Monthly change in price of residential properties in 70 cities (number of cities where prices have increased, decreased or remained stable) Increase MoM Stable Decrease MoM Source: CEIC, Bradesco 0 May-11 Nov-11 May-12 Nov-12 May-13 Nov-13 May-14 Nov-14 May-15 Nov-15 May-16 Nov-16 May-17 Global Outlook The most recent major adjustments focused on the foreign exchange market. Once again, the government changed the rules for fixing the renminbi s daily exchange rate. Back in July 2015, the government had established the daily closing rate (determined by the oscillation from the opening rate) and a currency basket as a reference for the opening rate for the following day. Since the end of May, PBoC started to use a counter-cyclical component in addition to the existing methodology. For the time being, the government has not disclosed the method for calculating this component, but we believe that the market s role in the exchange rate formation will be reduced. Since then, the Chinese currency has been on an appreciation path, which may be linked to this change in mechanism. However, there are several interpretations of this trend reversal for the renminbi, which had been relatively stable in recent months: (i) a response to the U.S. dollar s depreciation since the beginning of the year; (ii) one way of offsetting concerns 8

9 about the weak activity data for April released last month, and the downgrade announced by a risk agency at the time; (iii) signs of increased currency volatility, allowing for oscillations to occur in both directions; (iv) a way to counter bets against the Chinese economy, which would take place through currency depreciation. In fact, regarding this last argument, the difference between the exchange rates on the Chinese market (onshore) and on the Hong Kong (offshore) market widened in May. As a result, the government tightened liquidity in the offshore market as a way to increase the cost of selling RMB, reigning in speculation. It should be noted that the renminbi started to depreciate once again, after the Fed s move to raise interest rates. Still, we believe that there is increasingly less room for the Chinese currency to depreciate, as we expect the U.S. dollar to continue to lose value on a global scale in Nonetheless, we still see some risk for depreciation due to pressures related to capital outflow from the country, even though the government has maintained tight controls, ensuring the stability of foreign exchange flow from China. In other words, the final result of these forces remains unclear, partly because some of the risk related to the country s capital outflow was also tied to expectations that the renminbi would weaken. 7,2 Chart 5 China: exchange rate (USD/RMB) 6,88 6,81 6,83 6, ,39 6, ,70 6,59 6,63 6,41 6, ,20 6,96 6,9 6,83 6,79 6,6 6,3 6,04 6,0 22/06/08 22/10/08 22/02/09 22/06/09 22/10/09 22/02/10 22/06/10 Global Outlook 22/10/10 22/02/11 22/06/11 22/10/11 22/02/12 22/06/12 22/10/12 22/02/13 22/06/13 22/10/13 22/02/14 22/06/14 22/10/14 22/02/15 22/06/15 22/10/15 22/02/16 22/06/16 22/10/16 22/02/17 22/06/17 Source: Bloomberg, Bradesco In short, we maintain our assessment that the Chinese economy will continue to slow down over the next few quarters. However, we expect it to be a moderate and controlled slowdown, which should be good enough to keep growth at a minimum of 6.5% in Even though the government has adjusted some of its policies, we should not forget that a political transition is set to take place this October. Economic stability is seen as extremely important to guarantee a seamless and successful transition, as most of the Party s top leadership positions change hands. 9

10 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 23 rd (*) Forecast. na = not available. Source: Official figures Production and forecasts(*): BRADESCO 10

11 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. 11