Macro Research Economic outlook Macroeconomic Research Itaú Unibanco August 2017
Roadmap Global Economy Positive environment for emerging markets continues Global growth remains solid. We revised our GDP forecasts for China to 6.7% in 2017 and 6.3% in 2018, from 6.5% and 5.8%, respectively. Interest rates in developed countries are likely to continue rising, but the pace will be slow, as the Fed and ECB are careful not to derail the global recovery. Flows to emerging markets benefit from this environment and from the improving EM-DM growth differential. Risks remain modest at the moment: geopolitical uncertainty emanating from the Trump administration; a repricing in the inflation pessimism in the U.S.; too much tightening causing a sharp slowdown in China. Brazil Tougher fiscal challenges The tax hike is not enough to meet the primary budget target, which will still require extraordinary revenues and other compensatory measures to be accomplished. We revised downward our forecast for unemployment in 2018, incorporating more informality in the job market. Our estimates for GDP growth are 0.3% in 2017 and 2.7% in 2018. We revised our exchange rate estimates to 3.35 reais per U.S. dollar in 2017 (from 3.50) and 3.50 in 2018 (from 3.60), reflecting a more benign international scenario. We increased our estimate for 2017 inflation to 3.4% from 3.3% due to the recent tax hike; our call for 2018 remains at 4.0%. The Selic benchmark interest rate is expected to reach 7.25% by year-end. Macro Research
Global Economy: Our forecasts 2014 2015 2016 2017 2018 World 3.4 3.2 3.1 3.6 3.7 USA 2.4 2.6 1.6 2.1 2.3 Eurozone 1.2 1.9 1.7 2.0 1.7 Japan 0.0 1.1 1.0 1.5 1.3 China 7.3 7.2 6.7 6.7 6.3 Source: Itaú Unibanco, Haver Analytics Macro Research
Positive environment for emerging markets continues The positive environment for emerging markets is still on, as global growth remains solid; Interest rates in developed countries are likely to continue rising, but the pace will be slow, as the Fed and ECB are careful not to derail the global recovery; Flows to emerging markets benefit from this environment and from the improving EM-DM growth differential. Global GDP Growth 6.5% 6.0% 5.5% 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% 2.5% 2001 3.0% 2002 5.4% 5.5% 5.6% 4.9% 4.3% 2003 2004 2005 2006 2007 3.0% 2008 2009 5.4% -0.1% 2010 4.2% 2011 3.5% 3.4% 3.5% 3.4% 3.1% 3.6% 3.6% 2012 2013 2014 2015 2016 2017 2018 Source: Itaú, Haver Analytics
1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 U.S.: positive growth, despite a dysfunctional government GDP growth accelerated to 2.6% qoq/saar in 2Q17, from 1.2% in 1Q17. We believe that the economy will continue to grow at an above-trend pace of 2.5% in 2H17; We forecast U.S. GDP to grow 2.1% in 2017 and 2.3% in 2018; The softer inflation in the first half is likely to be transitory, as wages will likely accelerate with the tightening of labor markets. The Fed has signaled the start of balance-sheet normalization relatively soon and the continuation of gradual interest-rate hikes; Nonetheless, the dysfunctional U.S. government creates downside risks. On the domestic front, a government shutdown and the debt limit (early October) are the main risks, while there is little hope for a tax reform. On the external front, the main risk is North Korea, in particular, its implications for U.S.-China relations GDP Growth %, annualized 5.5% 4.5% 3.5% 2.5% 1.5% 0.5% -0.5% -1.5% -2.5% 1.5% 2.1% 2.3% Source: Itaú, Haver Analytics QoQ Annual
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: solid growth, ECB cautiously preparing to reduce its asset purchases Euro-area GDP expanded 0.57% qoq in 2Q17. Leading indicators suggest that the economy is maintaining its positive momentum; With a better economic outlook, the ECB will likely start a reduction in its asset purchases later this year. We maintain our GDP forecasts at 2.0% and 1.7% for 2017 and 2018, respectively. GDP Growth (Eurozone) % annualized 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% -1.0% -1.5% 1.7% 2.0% 1.7% QoQ Annual Source: Haver Analytics, Itaú
1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 China: stronger growth in 2017 and 2018 China s GDP grew by 6.9% yoy in 2Q17, maintaining the robust growth rate of the previous quarter; We now expect only a modest slowdown ahead, and revised China s GDP to 6.7% in 2017 (6.5%, previously) and 6.3% in 2018 (5.8%, previously); Why do we expect stronger Chinese growth?. First, the external sector is no longer a drag. Second, a recovery in private investment has offset the decrease in public investment. Third, the housing sector is more balanced. GDP Growth %, annualized 8.5% 8.0% 7.5% 7.0% 6.5% 6.0% 5.5% 5.0% 4.5% 4.0% 6,7% 6.7% 6.3% Source: Haver Analytics, Itaú, NBS QoQ Annual
LatAm: a benign external environment meets a still-clouded political scenario The external scenario remains benign for emerging market asset prices. Some positive news on the reform agenda led to an outperformance of the BRL in July, while uncertainties over mid-term elections in Argentina made the Argentine peso the worst performing currency last month; Activity remains weak almost everywhere, but the solid activity data in core economies make a recovery seem more likely; Many central banks are still finding room to cut interest rates, but in Argentina the challenging outlook for inflation will likely lead to more gradual rate cuts than we were previously expecting. 5.0% 4.0% GDP Growth 3.9% 4.2% 3.0% 2.0% 2.8% 1.6% 2.0% 2.5% 2.5% 2.1% 2.3% 1.0% 0.0% -1.0% -2.0% -3.0% -2.30% 2015 2016 2017F 2018F Argentina Chile Colombia Mexico Peru Source: Itaú
Latam: our forecasts Peru 2015 2016 2017 2018 2015 2016 2017 2018 GDP - % 3.3 3.9 2.9 4.2 PIB - % 2.6 2.3 2.0 2.1 PEN / USD (dec) 3.41 3.36 3.30 3.35 MXN / USD (dec) 17.4 20.7 18.5 18.5 Interest rates - (dec) - 3.75 4.25 3.25 3.25 Interest rates - (dec) - 3.25 5.75 7 6.5 IPC 4.4 3.2 2.5 2.5 IPC 2.1 3.4 5.4 3.3 Colombia 2015 2016 2017 2018 2015 2016 2017 2018 PIB - % 3.1 2.0 1.6 2.5 PIB - % 2.3 1.6 1.6 2.5 COP / USD (dec) 3175 3002 3130 3200 CLP / USD (dec) 709 670 675 685 Interest rates - (dec) - 5.75 7.50 5.25 4.50 Interest rates - (dec) - 3.50 3.50 2.00 2.50 IPC 6.8 5.8 4.2 3.8 IPC 4.4 2.7 2.4 2.8 Argentina 2015 2016 2017 2018 PIB - % 2.6-2.2 2.5 2.8 ARS / USD (dec) 13 15.85 18.0 20.5 Repo 7 d. (dec) - % n/a 24.75 25.00 16.00 IPC - % (Buenos Aires) 26.9 41.0 22.0 16.0 Mexico Chile Source: Itaú
Brazil: Our forecasts 2014 2015 2016 2017 2018 Economic Activity GDP (%) 0.5-3.8-3.6 0.3 2.7 Unemployment (%) December (PNAD cont.) 7.1 9.6 12.6 13.3 13.2 Inflation CPI (%) 6.4 10.7 6.3 3.4 4.0 Monetary Policy Selic Rate (%) 11.75 14.25 13.75 7.25 7.00 Fiscal Primary Surplus (% GDP) -0.6-1.9-2.5-2.4-1.8 Balance of Payments Exchange Rate (eop) 2.66 3.96 3.26 3.35 3.50 Current Account (% GDP) -4.2-3.3-1.3-0.7-1.6 Macro Research
Tax hike is not enough to meet the primary result targets The government increased fuel taxes in order to reinforce its commitment to the fiscal adjustment. However, the target of a deficit of 2.1% of GDP (BRL 142 billion) in 2017 remains under great threat, particularly because of uncertainties on the materialization of large extraordinary revenues. Keeping that in mind, we maintain our forecast for the primary deficit at 2.4% of GDP (BRL 155 billion) in 2017; We revised our estimate for the 2018 primary deficit downward, to 1.8% of GDP (BRL 131 billion) from 2.1%, in line with the target. The greatest risk to next year s target is slower economic growth than we currently anticipate; The pension reform has yet to run through Congress. General Government Gross Debt %GDP 80% 75% 70% 65% 70% 77% 75% 60% 55% 50% Source: Itaú, IBGE 45% 2006 2008 2010 2012 2014 2016 2018
Activity: the main economic indicators advanced in April and May The main economic indicators advanced in April and May, signaling a broader recovery in economic activity. Industrial production, broad retail sales and real service revenues expanded 1.9%, 0.5% and 1.1% cumulatively in these two months, respectively (seasonally-adjusted). The decline in confidence indicators in June amid greater political turmoil was not reflected in gross activity figures. Nevertheless, the outlook for 2Q17 GDP is a small contraction. Our estimate is -0.2% qoq/sa, driven by a discrete drop in agriculture GDP and unfavorable statistical carryover from many GDP components after weak March figures; Our GDP growth estimates are 0.3% in 2017 and 2.7% in 2018, in line with a gradual recovery amid slower political progress on reforms. If reforms move forward (particularly the pension reform), the recovery could be stronger next year. Confidence Indicators S.a. 120 110 100 90 80 70 Industry Commerce Services 60 Jun-09 Jun-11 Jun-13 Jun-15 Jun-17 Source: Itaú, IBGE GDP Growth QoQ s.a. 1.5% 1.0% 0.5% 0.0% -0.5% -1.0% -1.5% -2.0% Actual -2.5% Forecast 2013.IV2014.III 2015.II 2016.I 2016.IV2017.III 2018.II
Unemployment nearing its peak In net terms, 9,800 formal jobs were created in June (according to the Labor Ministry s CAGED registry). The seasonallyadjusted quarterly moving average improved to -16,000 from -41,000 and has been on a gradual positive trend since 2Q16; According to the national household survey (PNAD Contínua IBGE), Brazil s nationwide unemployment rate stood at 13.0% in the quarter ended in June vs. 13.3% in the quarter ended in May. Using our seasonal adjustment, unemployment dropped to 12.9% from 13.0% and has remained relatively stable throughout 2017; In sum, unemployment has been prevented from going up by a change in the composition of the labor market toward greater informality (i.e. more people working outside the formal economy). Hence, in our outlook for the labor market, we revised our expectations for the unemployment rate. Unemployment Rate %, seasonally adjusted Formal Job Creation (CAGED) 3MMA, thousands 14 13 12 12.9 13.4 13.2 250 11 10 150 9 50 8 7-50 6-150 5-250 Jun-09 Jun-11 Jun-13 Jun-15 Jun-17 Source: IBGE, Itaú, FGV
Benign international scenario for risky assets The Brazilian currency appreciated in a more benign international environment for risky assets. Domestically, the approval of the labor reform in Congress also helped to boost currency gains; We revised our year-end forecasts for the exchange rate to 3.35 in 2017 (from 3.50) and 3.50 in 2018 (from 3.60). Our new estimates incorporate a benign scenario for risky assets in the coming months, higher commodity prices (on average) and a weaker dollar against several currencies. Internally, however, uncertainties surrounding adjustments and reforms are set to continue, pressuring risk premiums. Country Risk Premium and Exchange Rate BRL/USD, CDS 5y 3.40 3.35 3.30 3.25 3.20 BRL CDS (rhs) 280 270 260 250 240 230 Exchange Rate BRL/USD, eop 4.50 4.00 3.50 3.00 3.35 3.20 3.50 3.15 3.10 3.05 220 210 200 190 2.50 2.00 1.50 3.00 180 Jan-17 Feb-17Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Source: Itaú, BCB
We expect inflation to reach 3.4% in 2017 and 4.0% in 2018 The larger-than-expected impact of the hike in fuel taxes more than offset the downward effect of revised exchange rate forecasts and more favorable inflation at the margin. We revised our 2017 forecast upward slightly for the headline consumer price index IPCA, to 3.4% from 3.3%; Our 2018 inflation estimate remains at 4.0%. Our below-target inflation estimate for next year will be driven chiefly by a negative output gap, along with less inertia from 2017 inflation and anchored inflation expectations. Source: Itaú, IBGE 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% IPCA Breakdown yoy IPCA Market-set prices (76%) Regulated prices (24%) 10.7% 6.3% 3.4% Forecast 0% Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 4.0%
Monetary policy: cruise speed, for now In its July meeting, the Central Bank s Monetary Policy Committee (Copom) delivered the expected outcome: a 100- bp rate cut, leading the Selic rate to 9.25% p.a. This marks the return of the Selic rate to single digit territory for the first time since November 2013; The minutes from the July meeting suggest that the debate within the committee, regarding the next policy meeting, remains limited to the range of 75-100 bps and also confirmed the signal, offered in the statement, that the base case for now is a 100-bp cut in September; After that, taking into account the stage of the cycle, the committee is likely to slow down the pace of easing to 50 bps per meeting, with the Selic rate ending the year at 7.25%. Selic % p.a. 16% 14% 12% 10% 8.97% 9.25% 8% 7.66% 7.00% 7.25% 6% 2008 2010 2011 2012 2013 2015 2016 2017 2018 Source: Itaú, Bloomberg Itau Unibanco Forecast Yield Curve Pricing Pricing as of Aug 8th
Conclusão Global Economy Positive environment for emerging markets continues Global growth remains solid. We revised our GDP forecasts for China to 6.7% in 2017 and 6.3% in 2018, from 6.5% and 5.8%, respectively. Interest rates in developed countries are likely to continue rising, but the pace will be slow, as the Fed and ECB are careful not to derail the global recovery. Flows to emerging markets benefit from this environment and from the improving EM-DM growth differential. Risks remain modest at the moment: geopolitical uncertainty emanating from the Trump administration; a repricing in the inflation pessimism in the U.S.; too much tightening causing a sharp slowdown in China. Brazil Tougher fiscal challenges The tax hike is not enough to meet the primary budget target, which will still require extraordinary revenues and other compensatory measures to be accomplished. We revised downward our forecast for unemployment in 2018, incorporating more informality in the job market. Our estimates for GDP growth are 0.3% in 2017 and 2.7% in 2018. We revised our exchange rate estimates to 3.35 reais per U.S. dollar in 2017 (from 3.50) and 3.50 in 2018 (from 3.60), reflecting a more benign international scenario. We increased our estimate for 2017 inflation to 3.4% from 3.3% due to the recent tax hike; our call for 2018 remains at 4.0%. The Selic benchmark interest rate is expected to reach 7.25% by year-end.
Would you like to continue this conversation? The app Itaú Economic Research sends you real time economy reports. Download now on your cellphone app store.
Relevant Information 1. This report has been prepared and issued by the Macro Research Department of Banco Itaú Unibanco S.A. ( Itaú Unibanco ). This report is not a product of the Equity Research Department of Itaú Unibanco or Itaú Corretora de Valores S.A. and should not be construed as a research report ( relatório de análise ) for the purposes of the article 1 of the CVM Instruction NR. 483, dated July 06, 2010. 2. This report aims at providing macroeconomics information, and does not constitute, and should not be construed as an offer to buy or sell, or a solicitation of an offer to buy or sell any financial instrument, or to participate in any particular trading strategy in any jurisdiction. The information herein is believed to be reliable as of the date on which this report was issued and has been obtained from public sources believed to be reliable. Itaú Unibanco Group does not make any express or implied representation or warranty as to the completeness, reliability or accuracy of such information, nor does this report intend to be a complete statement or summary of the markets or developments referred to herein. Opinions, estimates, and projections expressed herein constitute the current judgment of the analyst responsible for the substance of this report as of the date on which it was issued and are, therefore, subject to change without notice. Itaú Unibanco Group has no obligation to update, modify or amend this report and inform the reader accordingly. 3. The analyst responsible for the production of this report, whose name is highlighted in bold, hereby certifies that the views expressed herein accurately and exclusively reflect his or her personal views and opinions and were prepared independently and autonomously, including from Itaú Unibanco, Itaú Corretora de Valores S.A. and other group companies. 4. This report may not be reproduced or redistributed to any other person, in whole or in part, for any purpose, without the prior written consent of Itaú Unibanco. Additional information on the financial instruments discussed in this report is available upon request. Itaú Unibanco and/or any other group companies is not, and will not be liable for any investment decisions (or otherwise) based on the information provided herein. Additional Note to reports distributed in: (i) U.K. and Europe: The sole purpose of this material is to provide information only, and it does not constitute or should be construed as a proposal or request to enter into any financial instrument or to participate in any specific business strategy. The financial instruments discussed in this material may not be suitable for all investors, and are directed solely at Eligible Counterparties and Professionals as defined by the Financial Conduct Authority. This material does not take into consideration the objectives, financial situation or specific needs of any particular client. Clients must obtain financial, tax, legal, accounting, economic, credit and market advice on an individual basis, based on their personal characteristics and objectives, prior to making any decision based on the information contained herein. By accessing the material, you confirm that you are aware of the laws in your jurisdiction relating to the provision and sale of financial service products. You acknowledge that this material contains proprietary information and you agree to keep this information confidential. Itau BBA International plc (IBBAInt) exempts itself from any liability for any losses, whether direct or indirect, which may arise from the use of this material, from its content and is under no obligation to update the information contained in this document. Additionally, you confirm that you understand the risks related to the financial instruments discussed in this material. Due to international regulations not all financial instruments/services may be available to all clients. You should be aware of and observe any such restrictions when considering a potential investment decision. Past performance and forecast are not a reliable indicator of future results. The information contained herein has been obtained from internal and external sources and is believed to be reliable as of the date in which this material was issued, however IBBAInt does not make any representation or warranty as to the completeness, reliability or accuracy of information obtained by third parties or public sources. Additional information relative to the financial products discussed in this material is available upon request. Itau BBA International plc registered office is 20th floor, 20 Primrose Street, London, United Kingdom, EC2A 2EW and is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority (FRN 575225) Itau BBA International plc Lisbon Branch is regulated by Banco de Portugal for the conduct of business. Itau BBA International plc has representative offices in France, Germany, Spain which are authorised to conduct limited activities and the business activities conducted are regulated by Banque de France, Bundesanstalt fur Finanzdienstleistungsaufsicht (BaFin), Banco de España respectively. For any queries please contact your relationship manager; (ii) U.S.A: Itau BBA USA Securities, Inc., a FINRA/SIPC member firm, is distributing this report and accepts responsibility for the content of this report. Any US investor receiving this report and wishing to effect any transaction in any security discussed herein should do so with Itau BBA USA Securities, Inc. at 767 Fifth Avenue, 50th Floor, New York, NY 10153; (iii) Asia: This report is distributed in Hong Kong and Japan by Itaú Asia Securities Limited, which is licensed in Hong Kong by the Securities and Futures Commission for Type 1 (dealing in securities) regulated activity. Itaú Asia Securities Limited accepts all regulatory responsibility for the content of this report. In Hong Kong, any investors wishing to purchase or otherwise deal in the securities covered in this report should contact Itaú Asia Securities Limited at 29th Floor, Two IFC, 8 Finance Street Central, Hong Kong; (iv) Middle East: This report is distributed by Itau Middle East Limited. Itau Middle East Limited is regulated by the Dubai Financial Services Authority and is located at Suite 305, Level 3, Al Fattan Currency House, Dubai International Financial Centre, PO Box 482034, Dubai, United Arab Emirates. This material is intended only for Professional Clients (as defined by the DFSA Conduct of Business module) no other persons should act upon it; (v) Brazil: Itaú Corretora de Valores S.A., a subsidiary of Itaú Unibanco S.A authorized by the Central Bank of Brazil and approved by the Securities and Exchange Commission of Brazil, is distributing this report. If necessary, contact the Client Service Center: 4004-3131* (capital and metropolitan areas) or 0800-722-3131 (other locations) during business hours, from 9 a.m. to 8 p.m., Brasilia time. If you wish to re-evaluate the suggested solution, after utilizing such channels, please call Itaú s Corporate Complaints Office: 0800-570-0011 (on business days from 9 a.m. to 6 p.m., Brasilia time) or write to Caixa Postal 67.600, São Paulo-SP, CEP 03162-971.* Cost of a local call.