Economic Outlook Macro Research Itaú Unibanco June, 2013
Agenda Economia Global Heterogeneous growth: U.S. growing faster, Europe in recession. Deceleration in the emerging economies. The Fed signals a reduction in assets purchases. Stronger dollar and higher interest rates in international markets. América Latina: desaceleração da atividade, depreciação cambial e menor espaço para queda de juros atingem o grupo, com intensidades distintas em cada economia. Brasil GDP disappoints again in 1Q13. Slow growth in the last few years is a consequence of structural problems. Inflation under pressure, but likely to retreat temporarily in the second semester. The Brazilian real has moved with other currencies as the dollar appreciates at a global level, but inflationary pressures prevent a further devaluation of the real. The Copom hikes the Selic interest rate. How much? 2
Heterogeneous Performance Real GDP Index, 2007 = 100 120 forecast World 115 110 105 USA 100 Eurozone 95 90 85 80 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: Itaú Unibanco, BEA, Haver Analytics 3
China: Focus on Reforms, Lower Growth Recent policy signaling reflects less concern about short term growth and more focus on structural reforms that can lead to long run sustainable growth. GDP Growth YoY, % 15.0% 12.5% 10.0% 7.5% 5.0% 2007 2008 2009 2010 2011 2012 2013 2014 Source: Itaú Unibanco, CEIC 4
Emerging Economies Decelerate GDP Growth Emerging Economies QoQ, SAAR 3.3% 1.7% Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Countries: Brazil, Mexico, Chile, Colombia, South Korea, Singapore, Taiwan, Indonesia, Malaysia, Thailand, Russia, Ukraine, Poland, Hungary, Czech Republic, Turkey, South Africa Source: Itaú Unibanco, Haver Analytics, FMI 5
The Fed Signals a Reduction in Stimulus Expectations that the Fed will reduce its asset purchases has led to worldwide dollar appreciation and higher long interest rates in international markets. 10-Year Bonds Yields %, 5-day Moving Average 8.0 7.5 7.0 6.5 6.0 5.5 2.2 2.1 2.0 1.9 1.8 Dollar Appreciation Exchange Rates, % Change in May Developed Economies Emerging Markets Eurozone UK Canada Japan Australia Taiwan South Korea Singapore Russia 5.0 1.7 Peru Colombia 4.5 1.6 Turkey India 4.0 jan-13 fev-13 mar-13 abr-13 mai-13 jun-13 Mexico Turkey Hungary South Africa USA (rhs) 1.5 Mexico Chile Brazil South Africa Source: Itaú Unibanco, Haver Analytics, Bloomberg 6
World: Our Expectations for the Short Term 2004-2007 2012 2013 2014 World 5.1 3.2 2.8 3.4 USA 2.8 2.2 1.9 2.5 Eurozone 2.5-0.5-0.7 0.7 Japan 1.9 1.9 1.5 1.3 China 12.1 7.8 7.6 7.5 Source: Haver, CEIC, Bloomberg, Itaú Unibanco 7
Commodities: Our Expectations for the Short Term Itaú Unibanco Commodities Index 350 300 250 200 150 100 50 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: Itaú Unibanco 8
Latin America: Growth Divergence Peru Mexico 2013 2014 2013 2014 GDP - % 6.0 5.9 GDP - % 3.2 3.6 PEN / USD (YE) 2.60 2.55 MXN / USD (YE) 12.0 11.8 Interest Rate - (YE) - % 4.25 4.25 Interest Rate - (YE) - % 4.00 4.00 CPI - % 2.5 2.3 CPI - % 3.5 3.5 Colombia Chile 2013 2014 2013 2014 GDP - % 3.8 5.0 GDP - % 5.0 4.7 COP / USD (YE) 1880 1820 CLP / USD (YE) 480 470 Interest Rate - (YE) - % 3.25 4.50 Interest Rate - (YE) - % 5.00 5.00 CPI - % 2.8 3.0 CPI - % 2.3 2.8 Argentina 2013 2014 GDP - % 2.0 2.0 ARS / USD (YE) 5.90 7.7 BADLAR - (YE) - % 21.0 25.0 CPI - % (Private estimates) 30.0 35.0 Source: Itaú Unibanco 9
Growth in Brazil Disappointed GDP Forecasts for 2012 (%) GDP Forecasts for 2013 (%) 6 6 5 5 4 4 3 3 2 2 1 2010 2011 2012 Brazil Mexico Colombia Chile 1 2010 2011 2012 2013 Brazil Mexico Colombia Chile Source: Latin Focus Consensus Forecasts 10
Brazil: Our Expectations for the Short Term Economic Activity 2012 2013 2014 GDP % 0.9 2.4 2.8 Inflation IPCA % 5.8 5.8 6.0 Monetary Policy Selic Rate % 7.25 8.75 8.75 Fiscal Primary Surplus 2.4 1.5 0.9 Balance of Payments Exchange Rate (eop) 2.08 2.07 2.10 Current Account (% GDP) -2.4-3.2-3.3 Source: Itaú Unibanco and BCB 11
What Explains the Weak GDP in the Last Few Years? 5% 4% 3% 2% 1% 0% -1% GDP Growth Breakdown QoQ, SAAR -2% 2009.IV 2010.IV 2011.IV 2012.IV Consumption Investment Inventories & residual Gov. Expenditure Exports - imports GDP Deleveraging: Higher real interest rates (+150 bps) Macroprudential measures (reserve + capital requirements) Reduction in government current expenditure growth (to 0% from 10%-15%) Reduced BNDES disbursements Global risk aversion (VIX up to 40) High inventories, decelerating growth and imports Supply Issues: Fiscal expansion and interest rate cuts; economy reacts slowly Excessive interventionism creates higher economic policy risk Productivity deceleration seems stronger than cyclical factors; lower potential growth With low productivity growth, rising wages reduce margins and become a limitation on investment Inflation accelerates, affecting real income and consumption Signs of growing net imports Source: Itaú Unibanco, IBGE 12
Gradual Recovery Reflects Lower Potential GDP GDP (% Change, QoQ/sa) GDP Annual Growth 2.5% 8% 7.5% 2.0% 1.5% 7% 6% 5% 5.7% 6.1% 5.2% 1.0% 0.5% 0.0% 0.6% 0.8% 0.6% 0.5% 4% 3% 2% 1% 1.2% 3.2% 3.9% 2.7% 0.9% 2.8% 2.4% 0% -0.5% 2010 Q1 2011 Q1 2012 Q1 2013 Q1-1% -0.3% 2003 2005 2007 2009 2011 2013 Source: Itaú Unibanco, BCB 13
Growth Diffusion Points to Weak Activity Ahead GDP vs. Diffusion Index Broad Data Set - Diffusion 90% 80% 70% 60% 50% 40% 30% 20% 1995 1998 2001 2004 2007 2010 2013 13% 11% 9% 7% 5% 3% 1% -1% -3% -5% -7% -9% 90% 80% 70% 60% 50% 40% 30% 20% 2009 2010 2011 2012 2013 Diffusion index (-2) GDP 4Q (rhs) month 3MMA historical average Source: Itaú Unibanco 14
Confidence Remains Weak Industry Confidence Index (FGV) Consumer Confidence Index (FGV) 120 130 115 125 120 110 115 105 110 100 2010 2011 2012 2013 105 2010 2011 2012 2013 Source: Itaú Unibanco, FGV 15
Will the Labor Market Remain Tight? In our basic scenario, with GDP growing around 2.8% in 2013, the labor market doesn t cool down. Unemployment Rate %, sa 11 120 Average Real Wages sa (2003=100) 10 115 9 110 8 105 7 100 6 Year average 5 2011 6.0 2012 5.5 2013 5.3 4 2007 2009 2011 2013 95 Change in year 90 2011 2.7% 2012 4.1% 85 2013 2.5% 2007 2009 2011 2013 Source: IBGE, Itaú Unibanco 16
Exchange Rate Volatility Leads to Interventions and Loosening of Capital Controls Exchange Rate Reais per Dollar 2.20 2.15 2.10 2.05 2.00 1.95 1.90 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Source: Itaú Unibanco, BCB, Bloomberg 17
Exchange Rate Policy Is Constrained by Inflation Exchange Rate Pass-Through 10% Devaluation of the Brazilian Real 0.8% 0.7% 0.6% 0.5% 0.5% 0.6% 0.7% 0.4% 0.3% 0.2% 0.1% 0.0% 0.1% 1 2 3 4 Number of Quarters After Devaluation Currency Devaluation - 5% 10% Exchange Rate 2.07 2.17 2.27 IPCA 2013 5.8% 6.0% 6.3% IPCA 2014 6.0% 6.1% 6.2% Source: Itaú Unibanco 18
IPCA Likely to Retreat Temporarily, but Pressure Will Remain Tax breaks and food prices help to reduce inflation in the short run. IPCA Consumer Price Index 0.90% 7.0% 0.75% 6.2% 6.6% 6.7% 6.2% 6.5% 0.60% 6.2% 6.0% 0.45% 0.30% 5.6% 5.5% 0.15% 4.9% 5.0% 0.00% Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Monthly 12-month (rhs) 4.5% Source: Itaú Unibanco, IBGE 19
Selic: We Expect Hikes in a Faster Pace Selic Rate % 20% 18% 16% 14% 12% 10% 8% Selic 8.75% 6% 4% Real interest rate 2% 0% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: Bloomberg and Itaú Unibanco 20
Current Account Financing Depends on More Volatile Flows US$ billion Average 2007-2011 2012 2013 2014 Current account -30-54 -74-79 FDI 44 65 58 63 Portfolio FDI 36 17 20 20 Others -1-9 3 10 Balance of payments 49 19 6 12 Source: Itaú Unibanco, BCB 21
Higher Tax Exemptions in 2013 Last tax exemptions announced: Consumer staples: R$ 7 billion (2014). Tax breaks for 14 more sectors: R$ 6 billion (2014). IPI on vehicles: R$ 2 billion (2013). Recently announced tax exemptions R$ bn 100 90 1.7% of GDP 80 70 60 50 1.3% of GDP 12 30 40 30 20 0.3% of GDP 48 60 10 0 15 2012 2013 2014 Already announced Expected Source: Itaú Unibanco, Ministry of Finance 22
More Expansionary Fiscal Stance Primary Surplus (% GDP) 5 4 3 3.3 3.7 3.8 3.2 3.3 3.4 3.1 2 2.0 2.7 2.4 1 1.5 0.9 0-1 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Conventional Structural Source: Itaú Unibanco, BCB 23
Challenges Relatively High Labor Costs Manufacturing Sector Hourly Compensation Costs in 2011 (USD) Change in Unit Labor Costs in USD Terms (2005-10) 12 10 90% 80% 70% 8 60% 36% 50% 6 40% 4 2 30% 20% 10% 0% -10% 9% 26% -8% -1% 10% 20% 2% -3% 4% 12% 42% 0 Brazil Hungary Poland Mexico Phillippines -20% China South Korea Israel Mexico Poland Brazil Real exchange rate change Net costs Source: U.S. Bureau of Labor Statistics 24
Sweden France Germany Hungary Ukraine Poland Brazil Russia Spain Autralia USA South Korea Argentina Turkey Colombia Chile India China Venezuela Mexico Arab Emirates Challenges Heavy Tax Burden Tax Burden % of GDP 60% 50% 40% 34% 30% 20% 10% 0% Source: Heritage Foundation, International Energy Agency (2011); Design: Itaú Unibanco 25
Challenges: Infrastructure, Productivity Infrastructure Ranking (World Economic Forum) Ease of Doing Business 2012 Ranking (World Bank) Hong Kong Singapore 1 2 Chile 37 Germany 3 Peru 43 Chile 45 Colombia 45 Russia China 47 48 Mexico 48 Turkey 51 Uruguay 89 Mexico 68 Paraguay 103 Brazil India 70 84 Argentina 124 Peru 89 Brazil 130 Source: World Economic Forum, World Bank 26
Challenges - Less Labor, Need More Investment Labor contribution decreases. Growth depends on increasing investments and productivity. GDP Growth Decreasing Labor Contribution 8% 2.0% Labor Capital Productivity 7% 6% 1.5% 5% 4% 1.0% 3% 2.7% 2.8% 2.4% 2% 0.5% 1% 0.9% 0% 2010 2012 2014 2016 2018 2020 0.0% 2008-2011 2012-2015 2016-2020 Source: IBGE, Itaú Unibanco and U.S. Bureau of Labor Statistics 27
Spending on social security (% GDP) Challenges Lack of Domestic Savings Public Spending on Social Security 20% 18% Italy 16% Poland 14% 12% Brazil 10% 8% 6% 4% Mexico USA Japan 2% 0% Colombia 5% 10% 15% 20% 25% 30% Population aged 65+ (% total) Source: IBGE and Itaú Unibanco 28
China Challenges - Domestic Savings Must Increase to Enable Investments to Grow Japan Mexico Peru Chile Argentina Colombia Canada Brazil South Africa UK USA Domestic Savings (%, 2011) Investment Rate 22% 54 21% 24 23 23 22 22 20% 19 17 16 19% 13 18% 11 10 17% 16% 15% 2010 2012 2014 2016 2018 2020 Source: IMF and Itaú Unibanco 29
Conclusion World: Asymmetric growth in the advanced economies and deceleration in the emerging economies. Signals of monetary policy changes in the U.S. lead to a stronger dollar and higher interest rates in the international markets. Brazil: What explains weak GDP? High costs reducing margins, production and investment; deleveraging in the economy. The Brazilian real has moved with other currencies as the dollar appreciates on a global level, but inflationary pressures prevent a further devaluation. Inflation is likely to retreat temporarily in the second semester, but remains under pressure. We expect the SELIC interest rate to rise to 8.75%. 30
Long-Term Scenario Source: Itaú Unibanco 31