Macroeconomic Research Department Macroeconomic Research Department Brazil Economic Weekly August 22 nd, 2014 We expect consumer inflation to speed up to some extent during the rest of the year as the relief brought by some items in recent months goes into reverse Myriã Tatiany Bast The result of the IPCA-15 amplified consumer price index for August, which was released last week, came as no surprise to the market but it did highlight some important points related to the expected performance of consumer inflation for the rest of the year. The index showed an increase of 0.14%, lower than the IPCA-15 result for July (0.17%) but higher than the full result for that month (0.01%). This difference was partly related to the large variations in prices arising from Brazil hosting the World Cup which still influenced the index's findings. However, these variations should return to normal in September. The coming months are likely to show an upturn in food prices and less relief from controlled prices. Against this backdrop, we expect the IPCA index to speed up in the fourth quarter. We believe the slowdown in the index seen in mid-year was strongly affected by factors that will be reversed in the coming months. This expectation is confirmed by the performance of the inflation cores that have shown some easing, albeit very gradual. As a result, we expect the upcoming figures to show the IPCA index rising at a higher rate than seen recently and reaching 6.30% by the year-end. Unfavorable international backdrop and investment's slowdown lie behind the downturn in Latin American economies in 2014 Thomas Henrique Schreurs Pires BRAZIL ECONOMIC WEEKLY Latin American economies expanded below expectations at the start of the year, faced with the prospect of an unfavorable international outlook and cooling in domestic demand. This leads us to foresee the region's economy growing by 2.0% in 2014 and by 2.6% in 2015, below the historic average of 3.1% over the last 20 years. This disappointment in terms of growth is seen when we analyze the successive downward revisions in GDP projections since the end of last year. The median estimate of expectations in December 2013 for the region's growth in 2014 was 3.0%, slightly below the historic median, and 3.4% for 2015. This was due to the disappointment over the growth in recent quarters of the main Latin Americas economies (Brazil, Mexico and Chile), along with the prospects for the performance of the Argentinean economy. The outlook for the growth of the Latin American economies points to a strong cooling this year, brought about by the challenging international scenario combined with the loss of the impetus from productive investment. As a result, we foresee the region's GDP rising only slightly in 2015 in response to the better outlook for the international economy and the monetary stimulus measures accumulated over the last year. 1
We expect consumer inflation to speed up to some extent during the rest of the year as the relief brought by some items in recent months goes into reverse Myriã Tatiany Bast The result of the IPCA-15 amplified consumer price index for August, which was released last week, came as no surprise to the market but it did highlight some important points related to the expected performance of consumer inflation for the rest of the year. The index showed an increase of 0.14%, lower than the IPCA- 15 result for July (0.17%) but was higher than the full result for that month (0.01%). This difference was partly related to the large variations in prices arising from Brazil hosting the World Cup which still influenced the index's findings. However, these variations should return to normal in September. The coming months are likely to show an upturn in food prices and less relief from controlled prices. Against this backdrop, we expect the IPCA index to speed up in the fourth quarter. Attention at the start of this year was focused on inflationary pressures from the food group which registered strikingly high monthly levels. The pressures were concentrated to a great extent on the prices of fresh food products although meat prices had also jumped. As fresh food products had risen by annual rates of more than 17% over a two-year period, their performance stood out. 6 9,0% 5 4 5,6% 7,2% 10,6% 50,2% 10,8% 12,0% 9,0% 6,0% Fresh food products within the IPCA index over 12 months and monthly 3 3,3% 3,7% 0,8% 1,7% 3,6% 2,8% 3,0% 2 1-1,2% -0,9% -1,2% -3,0% -1-5,4% -5,1% -4,1% Jan-11 Feb-11 Apr-14 May-14 Jun-14 Jul-14 Aug-14-6,5% -6,0% 1,4% -6,1% -9,0% Source: IBGE Domestic Outlook Food consumed at home item within the IPCA index - over 12 months and monthly Source: IBGE 3,0% 2,0% 1,0% -1,0% -2,0% 0,41% -0,37% -0,21% Monthly 12M 2,06% 1,25% -0,06% -1,30% -1,71% 1,40% -0,61% 2,76% 2,40% 1,24% 0,67% -0,15% -0,62% -0,96% -0,03% 1,70% 2,49% 15,71% 1,25% 1,17% 1,10% 0,74% 0,83% 0,89% 0,68% 0,52% 0,36% 0,21% 0,05% -0,36% -0,73% 1,07% 2,43% 4,51% Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Apr-14 May-14 Jun-14 Jul-14 Aug-14 1,52% 0,41% 1 12,5% 1 7,5% -0,51% -0,66% 2,5% 2
However, the variation in these prices began to ease from May. The food group also followed quickly and showed deflation in June. The problems stemming from the drought which were contributory factors to the pressures at the beginning of the year were assuaged and the food group has benefited from the better weather conditions since then. Furthermore, the good grain crop in Brazil and Argentina in the first half of the year and in the United States where harvesting is underway, have led to sharp falls in international prices of the main grains since the middle of the year, thereby confirming the bright outlook for food prices. Moreover, although this is a year in which the readjustments of the main charges for utilities and other bills have been higher than in 2013, particularly electrical energy prices, we would underscore the fact that the IPCA index also benefited from some cuts in charges, such as water and sewage services in São Paulo 1, electrical energy in Salvador 2 and fixed telephony throughout the country. We should also not omit the effects of the World Cup on the IPCA index as it impacted air fares and daily hotel rates in June and put pressure on the headline index. However, the July result showed that some of the increases seen in June had already retreated. We expect the full IPCA result for August to end this cycle of pressures and price retreats brought about by the World Cup. Hotel rates Air fares June 25.33% 21.95% July -7.65% -26.86% August* -23.45% 10.27% Variation in the IPCA index of items related to the World Cup (*) The August figures refer to the IPCA-15 index. As a result, some of the factors that contributed to the IPCA's lower variations in recent months are showing signs of a turnaround that should materialize from September. The first of these factors is food where prices have been showing lesser deflation in the wholesale indices and fresh food prices. Although a part of this recovery may be seasonal, some items could show above average movements, highlighted by meat, influenced by the international market. The contribution from controlled prices may also be different, as the main declines have already been incorporated into the index. The upcoming readjustments, which have still not been computed within the index, are likely to be positive and have an upward potential. We are also assuming a readjustment of 5% in gasoline prices. 1 9,0% 8,00% 8,43% 8,99% 7,46% Quarterly IPCA index annualized 2013-2014* 7,0% 6,0% 6,29% 4,82% 4,0% 3,0% 2,0% 2,49% 2,75% 1,0% Domestic Outlook 1 Q 2013 2 Q 2013 3 Q 2013 4 Q 2013 1 Q 2014 2 Q 2014 3 Q 2014 4 Q 2014 We believe the slowdown in the index seen in mid-year was strongly affected by factors that will be reversed in the coming months. This expectation is confirmed by the performance of the inflation cores that have shown some easing, albeit very gradual. When we analyze the performance of the services sector considering the accumulated variations over six and 12 months in order to reduce the volatility caused by the World Cup we are still seeing very strong results, particularly bearing in mind the 1 Consumers of the water company Sabesp who reduced their monthly consumption received discounts in their bills. 2 There was a discount in the contribution of the PIS/Cofins tax. 3
moderation of domestic activity accumulated over recent quarters. This performance by service prices, for its part, is still extremely resilient and points to some resistance to the slowdown which is tied mainly to the rise in wages which have also remained at a high level throughout the year. We are not assuming any strong deceleration in household income in the second half of the year and, therefore, expect the variation in service prices to remain at a high level until the end of the year. 12,0% 11,0% 1 9,0% 12 months Six months in seasonally and annually-adjusted terms 9,7% 8,5% 7,8% 10,6% 10,2% 9,3% 9,5% 9,2% 8,1% IPCA services 12 months and six months in seasonally and annually-adjusted terms 2004-2014 7,0% 6,7% 6,6% 6,0% 4,0% 6,0% 5,7% 4,6% 5,9% Dec-04 Feb-05 Apr-05 Jun-05 Aug-05 Oct-05 Dec-05 Feb-06 Apr-06 Jun-06 Aug-06 Oct-06 Dec-06 Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-14 Jun-14 Aug-14 As a result, we expect the upcoming figures to show the IPCA index rising at a higher rate than Domestic Outlook seen recently and reaching 6.30% by the yearend. 4
Unfavorable international backdrop and investment's slowdown lie behind the downturn in Latin American economies in 2014 Thomas Henrique Schreurs Pires Latin American economies expanded below expectations at the start of the year, faced with the prospect of an unfavorable international outlook and cooling in domestic demand. This leads us to foresee the region's economy growing by 2.0% in 2014 and by 2.6% in 2015, below the historic average of 3.1% over the last 20 years. This disappointment in terms of growth is seen when we analyze the successive downward revisions in GDP projections since the end of last year. The median estimate of expectations in December 2013 for the region's growth in 2014 was 3.0%, slightly below the historic median, and 3.4% for 2015. This was due to the disappointment over the growth in recent quarters of the main Latin Americas economies (Brazil, Mexico and Chile), along with the prospects for the performance of the Argentinean economy. 6,0 5,0 5,2 5,1 5,1 World Advanced economies Developing countries Latin America 4,9 4,9 4,8 4,8 4,8 4,7 Average estimates for GDP growth 2014 4,0 3,0 2,0 3,6 3,6 3,6 3,6 3,6 3,5 3,4 3,0 2,9 2,8 2,5 2,1 2,2 2,2 2,3 2,3 2,2 2,2 2,1 1,9 3,3 3,3 1,9 1,9 1,8 1,7 1,7 1,0 0,0 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Average estimates for GDP growth 2015 6,0 5,0 World Advanced economies Developing countries Latin America 5,4 5,3 5,3 5,3 5,2 5,2 5,2 5,1 5,1 4,0 3,7 3,7 3,7 3,7 3,7 3,7 3,7 3,6 3,6 3,0 3,4 3,2 3,2 3,1 3,1 Global Outlook 2,0 1,0 0,0 2,9 2,8 2,8 2,7 2,4 2,4 2,4 2,4 2,4 2,4 2,4 2,4 2,4 Apr-14 May-14 Jun-14 Jul-14 Aug-14 5
5,0 4,0 3,0 2,0 Mexico Chile Brazil Argentina 4,2 4,2 4,0 3,9 3,5 3,6 3,4 3,3 3,3 3,4 3,1 3,0 3,1 3,0 2,8 2,9 2,7 2,6 2,3 2,3 2,3 2,1 2,2 2,0 1,9 1,8 1,8 Average estimates for GDP growth 2014 1,0 1,3 1,3 1,0 0,0 0,3 0,0 0,2-1,0-0,7-0,9-1,0-2,0 Apr-14 May-14 Jun-14 Jul-14 Aug-14 The worsening in the global outlook for Latin America may be attributed mainly to: (i) the lower global demand for commodities, particularly metals, due to the cooling of the Chinese economy, and greater supply of grains and subsequent fall in prices; and (ii) the decline in capital flows to the emerging economies arising from the better expectation for the growth of the developed countries. However, these factors have hit the economies of the Latin American countries to a different extent. At the same time, although all the Latin American economies were vulnerable to this adverse international scenario, a large part of the slowdown in the region's growth is due to the weak performance of domestic demand, particularly the performance of investments. This is shown in the following graph which compares interannual GDP growth in Latin America (red line) with the contribution made by each component from the demand side (colored bars). The performance of the region's aggregate growth, with a lower contribution from investments in recent quarters, is also seen in a general way among the countries that make up the sample 1. 11,0% 9,0% 7,0% Household consumption Government consumption Investment Net external sector GDP Latin America: Contribution to GDP growth 3,0% 1,0% -1,0% -3,0% - mar/05 jun/05 set/05 dez/05 mar/06 jun/06 set/06 dez/06 mar/07 jun/07 set/07 dez/07 mar/08 jun/08 set/08 dez/08 mar/09 jun/09 set/09 dez/09 mar/10 jun/10 set/10 dez/10 mar/11 jun/11 set/11 dez/11 mar/12 jun/12 set/12 dez/12 mar/13 jun/13 set/13 dez/13 mar/14, IMF Global Outlook Colombia is the exception to this trend towards a lower contribution by investments as the external sector has had a greater impact than in the other countries. The reason why Colombia's economy has outperformed the others is that the country has managed to take advantage of the low international interest rates, controlled domestic inflation and fiscal conditions to operate with anticyclical policies, cutting base interest rates and expanding government investments in infrastructure. This combination of measures has ensured higher investments and employment which has, in turn, restored domestic consumption. The following graphs highlight this different performance by the Colombian economy and also show that the impact of the cooling of investments is becoming more important in reducing growth in the other countries in the region than the unfavorable international scenario. 1 Argentina, Brazil, Chile, Colombia, Mexico and Peru. 6
14,0% 12,0% 1 Household consumption Government consumption Investment Net external sector GDP Colombia: Interannual GDP growth vs. Contribution from the demand side 6,0% 4,0% 2,0% -2,0% -4,0% -6,0% mar-05 jun-05 set-05 dez-05 mar-06 jun-06 set-06 dez-06 mar-07 jun-07 set-07 dez-07 mar-08 jun-08 set-08 dez-08 mar-09 jun-09 set-09 dez-09 mar-10 jun-10 set-10 dez-10 mar-11 jun-11 set-11 dez-11 mar-12 jun-12 set-12 dez-12 mar-13 jun-13 set-13 dez-13 mar-14, IMF Contribution by the net external sector (exports less imports) to the interannual GDP growth of Latin American countries 1 1 - Argentina Brazil Chile Colombia Mexico Peru 1,2% 3,3% 10,8% 8,1% 2,8% 1,4% -2,2% -2,6% -1-10,5% -1-2 -19,1% -2-24,0% 3 2 2 1 1 23,6% 26,1% Argentina Chile Mexico 10,7% Brazil Colombia Peru 16,9% Contribution by investments to the interannual GDP growth of Latin American countries - -0,8% -2,1% -1-8,6% -8,6% -1-12,4% Interannual GDP growth of Latin American countries 1 1 12,1% Argentina Chile Mexico Brazil Colombia Peru 6,8% 6,4% Global Outlook - -1 4,8% 1,9% 1,6% -0,2% -1,5% -7,9% Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 May-14 7
The Chilean and Peruvian economies both end up being influenced by the lower global demand for metal commodities. On one hand, this reduces their exports and, on the other, cuts the impetus of investments of the extractive industry which is an important industrial sector for both countries. The Mexican economy has registered a sharper slowdown due to its fiscal reform program (spending cutbacks) and the weak performance of the American economy to the first quarter of this year. However, the favorable outlook for domestic inflation, with prices varying within or below the target interval and/ or inflation expectations converging to the target in the coming months, offset some of these negative elements with the reduction in base interest rates. 13,0 12,0 11,0 12,50 Brazil Chile Colombia Mexico Peru 11,00 Benchmark interest rates (%) 10,0 9,0 8,0 7,0 7,25 6,0 5,0 4,0 3,0 5,25 3,25 4,50 4,25 3,75 3,50 3,00 2,0 Feb-11 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Finally, Argentina which has been cut off from the international capital markets to finance itself since the default of 2001 has upheld its current account surplus or has remained close to zero which has made it even more exposed to the worsening in international demand for commodities. This situation is aggravated even further by Argentina's lack of appeal in terms of receiving flows of foreign direct investment as a result of investors' lack of confidence in the government's economic policy. Furthermore, the standoff in the negotiations between Argentina and the creditors who did not participate in the debt renegotiations of 2005 and 2010 are worsening the uncertain Global Outlook outlook and is a contributory factor in entrenching the economic crisis which should lead GDP to shrink by 2.3% this year. In overall terms, the outlook for the growth of the Latin American economies points to a strong cooling this year, brought about by the challenging international scenario combined with the loss of the impetus from productive investment. As a result, we foresee the region's GDP rising only slightly in 2015 in response to the better outlook for the international economy and the monetary stimulus measures accumulated over the last year. 8
Bradesco Macroeconomic Forecast 2005-2015 Bradesco Macroeconomic Forescast 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014* 2015* DOMESTIC ACTIVITY, INFLATION AND INTEREST RATES GDP (%) 3.2 4.0 6.1 5.2-0.3 7.5 2.7 1.0 2.5 1.0 1.5 Agriculture (%) 0.3 4.8 4.8 6.3-3.1 6.3 3.9-2.3 7.3 2.0 3.0 Industry (%) 2.1 2.2 5.3 4.1-5.6 10.4 1.6-0.8 1.7-1.0 1.3 Services (%) 3.7 4.2 6.1 4.9 2.1 5.5 2.7 1.7 2.2 1.6 1.5 Private consumption (%) 4.5 5.2 6.1 5.7 4.4 6.9 4.1 3.1 2.6 1.5 1.5 Government consumption (%) 2.3 2.6 5.1 3.2 3.1 4.2 1.9 3.2 2.0 2.5 1.0 Investment (%) 3.6 9.8 13.9 13.6-6.7 21.3 4.7-4.0 5.2-5.0 3.0 Exports of goods and services (%) 9.3 5.0 6.2 0.5-9.1 11.5 4.5 0.5 2.5 0.1 3.0 Imports of goods and services (%) 8.5 18.4 19.9 15.4-7.6 35.8 9.7 0.2 8.3-3.0 4.0 GDP (R$ billion - current prices) 2,147 2,369 2,661 3,032 3,239 3,770 4,143 4,392 4,844 5,272 5,751 GDP (US$ billion) 882 1,088 1,366 1,652 1,621 2,141 2,473 2,247 2,245 2,291 2,392 Population (million) 185.2 187.3 189.5 191.5 193.5 195.5 197.4 199.2 201.0 202.8 204.5 Per Capita GDP (US$ - current prices) 4,810 5,865 7,281 8,716 8,469 11,083 12,531 11,281 11,168 11,292 11,693 Industrial Production - IBGE (%) 2.8 2.7 5.9 3.1-7.1 10.2 0.4-2.3 2.0-1.5 2.5 Unemployment Rate - IBGE (%) 9.9 10.0 9.3 7.9 8.1 6.7 6.0 5.5 5.4 5.2 5.7 Retail Sales - (%) 4.8 6.2 9.7 9.1 5.9 10.9 6.7 8.4 4.5 3.3 3.5 CPI - IPCA - IBGE (%) 5.69 3.14 4.46 5.90 4.31 5.91 6.50 5.84 5.91 6.30 6.00 CPI - FIPE (%) 4.5 2.5 4.4 6.2 3.7 6.4 5.8 5.1 3.9 5.6 6.0 WPI - IGP-M - FGV (%) 1.2 3.8 7.8 9.8-1.7 11.3 5.1 7.8 5.5 5.0 5.5 Nominal Interest Rates - Selic target (end of period - %) 18.00 13.25 11.25 13.75 8.75 10.75 11.00 7.25 10.00 11.00 11.00 Nominal Interest Rates - Selic target (12-month - %) 19.04 15.08 11.85 12.48 9.92 9.78 11.62 8.48 8.21 10,82 10,81 Real Interest Rates - Selic (12-month - %) 12.64 11.58 7.08 6.21 5.38 3.66 4.80 2.50 2.18 4,25 4,54 EXTERNAL ACCOUNTS AND FX Trade Balance (US$ billion) 44.7 46.5 40.0 24.9 25.4 20.1 29.8 19.4 2.6-1.6-0.1 Exports (US$ billion) 118.3 137.8 160.6 197.9 153.0 201.9 256.0 242.6 242.2 236.5 245.3 Imports (US$ billion) 73.6 91.3 120.6 173.0 127.6 181.8 226.2 223.1 239.6 238.0 245.4 Trade flow (exports + imports) (% of GDP) 21.8 21.1 20.6 22.4 17.3 17.9 19.5 20.7 21.5 20.7 20.5 Deficit of Services and Income (US$ billion) -34.3-37.1-42.5-57.3-52.9-70.3-85.3-76.5-87.3-82.6-88.0 Current Account Deficit (US$ billions) 14.0 13.6 1.6-28.2-24.3-47.3-52.5-54.2-81.4-81.4-84.2 Current Account Deficit (% of GDP) 0.9 0.8 0.1-1.7-1.6-2.2-2.1-2.4-3.6-3.6-3.6 Foreign Direct Investment (US$ billions) 15.1 18.8 34.3 45.1 25.9 48.5 66.7 65.3 64.0 60.0 64.2 FX - end of period (R$ / US$) 2.34 2.14 1.77 2.34 1.74 1.67 1.88 2.04 2.35 2.35 2.45 FX - yearly average (R$ / US$) 2.43 2.18 1.95 1.83 2.00 1.76 1.67 1.95 2.16 2.30 2.40 Nominal FX devaluation (YoY - %) -11.8-8.7-17.2 31.9-25.5-4.1 12.6 8.9 14.8 0.2 4.3 Nominal FX devaluation (average - %) -16.8-10.6-10.5-5.8 9.0-9.9-4.8 16.7 10.4 6.6 4.5 International Reserves (US$ billion) 53.8 85.8 180.3 206.8 239.1 288.6 352.0 378.6 373.5 382.8 394.3 Total Medium and Long term External Debt (US$ billion) 168.9 172.5 193.2 198.4 202.3 256.8 298.2 312.9 312.0 - - FISCAL ACCOUNTS Primary Surplus (R$ billions) 81.3 75.9 88.1 103.6 64.8 101.7 129.0 105.0 92.1 63.3 115.0 Primary Surplus (% of GDP) 3.8 3.2 3.3 3.4 2.0 2.7 3.1 2.4 1.9 1.2 2.0 Public Sector Nominal Balance (% of GDP) -3.6-3.6-2.8-2.0-3.3-2.5-2.6-2.5-3.3-4.2-4.1 Net Public Debt (domestic and external) (R$ billion) 1,040 1,120 1,211 1,168 1,362 1,475 1,508 1,551 1,637 1,871 2,099 Net Public Debt (domestic and external) (% of GDP) 48.4 47.3 45.5 38.5 42.1 39.1 36.4 35.3 33.8 35.5 36.5 As of August 22 nd (*) Forecast. na = not available. Source: Official figures Production and forecasts(*): BRADESCO 9
Team Octavio de Barros - Macroeconomic Research Director Marcelo Cirne de Toledo Global economics: Brazil: Brazilian sectors: Fabiana D Atri / Felipe Wajskop França / Thomas Henrique Schreurs Pires Robson Rodrigues Pereira / Andréa Bastos Damico / Igor Velecico / Ellen Regina Steter / Andréa Marcos Angelo / Leandro de Oliveira Almeida Regina Helena Couto Silva / Priscila Pacheco Trigo Proprietary survey: Fernando Freitas / Leandro Câmara Negrão Internships: Ariana Stephanie Zerbinatti / Gabriela Helena Demarchi / Vanderley Rodrigues Gonçalves Junior / Otavio de Almeida Janny Teixeira / Lucas Zaniboni / Felipe Escandor Rubio / Thomaz Lopes Macetti 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