Economic Outlook January, 2012
Summary Global economy Low global growth scenario, tail risks have become smaller. Risks (Debt Ceiling, elections in Italy, growth in Europe). Brazil Activity shows signs of improvement. Recovery should continue at a moderate pace. Exchange rate should remain stable in the short term, interest rates may fall again. More expansionist fiscal stance. Inflation above target. 2
World: Weak Growth Trend Global GDP (Annual Growth) 6% 5% 4,9% 4,5% 5,2% 5,4% 5% 5,3% 4% 3,9% 3% 2,8% 2,9% 3,0% 3% 2% 1% 0% -1% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013-0,6% Source: Itaú Unibanco and IMF 3
Growth Somewhat Improved, Lower Risks Europe PMIs: recovery in November and December Level still indicates recession and recovery has to continue in the coming months in order to become compatible with our scenario for a stable GDP in the 1Q13. China: activity data for the last months has been pointing to a moderate recovery. Industrial Production increased to 10.1% YoY in November, from 9.6% YoY in October; Slight acceleration in the margin in last three months: average monthly growth of 1.0% (average between May and August: 0.7%). Global GDP qoq / saar variation Global PMI 4,5% 65 60 3,0% 55 50 45 1,5% 40 35 0,0% Source: Bloomberg and Itaú BBA Mar-11 Dec-11 Sep-12 Jun-13 30 2007 2008 2009 2010 2011 2012 Manufacturing Service 4
World: Our Expectations for the Short Term 2004-2007 2012 2013 2014 World 5.0 2.9 3.0 3.4 USA 2.8 2.3 2.0 2.2 Eurozone 2.5-0.4-0.1 1.1 Japan 1.9 2.0 0.4 0.9 China 12.1 7.7 7.9 7.5 Source: Haver, CEIC, Bloomberg e Itaú Unibanco 5
Commodities: Our Expectations for the Short Term Grains: crop loss in the U.S. increased prices in 2Q12. Prices should fall in 2013, due to stock recomposition and supply normalization. Base Metals: we expect an increase consistent with our modest global growth scenario. Itaú Commodities Index 400 ICI - Agriculture 350 ICI - Metals 300 ICI - Energy 250 200 150 100 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Source: Itaú Unibanco 6
Commodities: Our Expectations for the Short Term Itaú 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 7
Latin America: Robust Growth in Several Countries. Argentina Is Worst Peru Mexico 2012 2013 2012 2013 GDP - % 6.5 6.2 GDP - % 3.8 3.3 PEN / USD (YE) 2.55 2.50 MXN / USD (YE) 12.9 12.0 Interest Rate - (YE) - % 4.25 4.25 Interest Rate - (YE) - % 4.50 4.50 CPI - % 2.7 3.0 CPI - % 3.8 3.4 Colombia Chile 2012 2013 2012 2013 GDP - % 3.4 3.5 GDP - % 5.5 4.9 COP / USD (YE) 1767 1800 CLP / USD (YE) 479 460 Interest Rate - (YE) - % 4.25 3.75 Interest Rate - (YE) - % 5.00 5.00 CPI - % 2.4 2.8 CPI - % 1.6 2.5 Argentina 2012 2013 GDP - % 0.0 2.0 ARS / USD (YE) 4.92 5.9 BADLAR - (YE) - % 15.4 21.0 CPI - % (Private estimates) 25.0 30.0 Source: Itaú Unibanco 8
LatAm: Growth Disappointed in Brazil Real GDP Growth (%) 5,6 5,1 4,6 4,1 3,6 3,1 2,6 2,1 1,6 1,1 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Brazil Mexico Colombia Chile Source: Latin Focus Consensus Forecasts and Itaú Unibanco 9
Brazil: Our Expectations for the Short Term Economic Activity 2012 2013 2014 GDP % 0.9 3.2 4.0 Inflation IPCA % 5.8 5.6 6.0 Monetary Policy Selic Rate % 7.25 6.25 6.25 Fiscal Primary Surplus 2.4 2.1 1.1 Balance of Payments Exchange Rate (eop) 2.08 2.15 2.15 Current Account (% GDP) -2.3-2.4-2.2 Commodities * (YE, yoy change) 8% 1% 3% * Itaú Commodity Index, in U.S.-dollar terms Source: Itaú Unibanco e BCB 10
2007 Q4 2008 Q1 2008 Q2 2008 Q3 2008 Q4 2009 Q1 2009 Q2 2009 Q3 2009 Q4 2010 Q1 2010 Q2 2010 Q3 2010 Q4 2011 Q1 2011 Q2 2011 Q3 2011 Q4 2012 Q1 2012 Q2 2012 Q3 2012 Q4 2013 Q1 2013 Q2 2013 Q3 2013 Q4 Disappointment in 2012, Moderate Recovery in 2013 GDP (% Change, qoq/sa) 5% 4% 3% 2,6% 2,7% 2,0% 2% 1% 0% -1% 2,1% 1,8% 1,5% 1,6% 1,5% 1,2% 1,0% 1,0% 0,7% 0,5% 0,6% 0,7% 0,9% 0,9% 0,9% 0,9% 0,1%0,1% 0,1% 0,2% -2% -1,6% -3% -4% -5% -3,9% Source: BCB and Itaú Unibanco 11
Activity: Signs of Recovery Retail Sales 3MMA, annualized growth Industrial Production YoY % change 20% 10% 15% 5% 10% 10,6% 0% -5% 5% -10% 0% -15% -5% 2007 2008 2009 2010 2011 2012-20% 2009 2010 2011 2012 Source: FGV, IBGE, and Itaú BBA 12
Investment Still to React Industry Confidence vs. Gross Fixed Capital Formation 125 35% 30% 115 25% 20% 105 15% 95 10% 5% 85 0% -5% 75-10% -15% 65 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012-20% Industry Confidence (FGV) GFCF (YoY - right) Source: FGV e Itaú Unibanco 13
Labor Market Remains Heated Unemployment Rate %, sa Average Real Wages sa (2003=100) 11 115 10 9 110 8 105 7 100 6 5 95 4 2007 2008 2009 2010 2011 2012 90 2007 2008 2009 2010 2011 2012 Source: IBGE and Itaú Unibanco 14
Inflation Hovers at New Level IPCA Core 12 - month rate IPCA Breakdown 12 month rate 8% 10% 7% 9% 8% 8,0% 6% 5,7% 7% 5,7% 6% 5% 5% 4,6% 4% 4,4% 4,5% 4% 3% 3% 2% 1% 2% 2006 2007 2008 2009 2010 2011 2012 0% 2006 2007 2008 2009 2010 2011 2012 Tradables Non-tradables Source: Bloomberg and Itaú Unibanco 15
Inflation Under Pressure in 1Q13, but Retreating from 1Q13 Onward IPCA 0,90% 6,4% 6,3% 6,2% 0,75% 6,1% 6,5% 6,3% 6,1% 0,60% 0,45% 5,8% 5,6% 5,9% 5,7% 5,5% 0,30% 0,15% 4,9% 5,3% 5,1% 4,9% 4,7% 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: IBGE and Itaú BBA 16
Exchange Rate in a Narrower Range Exchange rate is respecting the R$2.00 to R$2.10 range, but we expect to dollar to reach R$ 2.15 until the end of the year. Exchange Rate Intraday Range 2,15 Real vs. Currencies Commodity Exporters* Currencies Basket = Real in Oct 2009 2,10 2,05 2,00 1,95 perceived range 2,10 2,00 1,90 Real Commodity Exporters Average* 1,90 1,85 1,80 1,80 1,70 1,75 1,70 1,60 1,65 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 1,50 2010 2011 2012 2013 Source: BCB and Itaú Unibanco *Mexico, Chile, Australia, New Zealand, South Africa, Norway and Canada 17
Low Interest Rates to Stay Low Selic Rate % 25% 20% 15% 10% 5% Real interest rate 0% 2004 2006 2008 2010 2012 Source: Bloomberg e Itaú Unibanco 18
Decreasing Fiscal Effort Structural Primary Surplus % GDP 5% 4,5% 4,5% 4% 4,2% 3,8% 3,5% 3,4% 3% 2,9% 2,5% 2% 2,0% 1% 1,1% 1,3% 1,0% 0% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: Banco Central, Itaú Unibanco 19
Tax Exemptions Triple in 2013 Already announced (tax exemption estimate for 2013): Reduction of IOF on credit for individuals Tax exemption on payroll Cide at zero Tax exemption on construction materials and capital goods Tax reduction on electricity Tax exemption on civil construction (payroll, others) IPI reduction on vehicles, durable goods PIS/Cofins new tax rates (and reform) Income tax exemption on Profit Sharing schemes R$ 3 billion R$ 13 billion R$ 5 billion R$ 5 billion R$ 4 billion R$ 4 billion R$ 2 billion R$ 10 billion R$ 2 billion In the future: ICMS, other tax exemptions on payroll Estimated total (2012): Announced total (2013): R$ 15 billion (0.3% of GDP) R$ 48 billion (1.0% of GDP) Source: Itaú BBA, Ministry of Finance 20
Challenges Relatively High Labor Costs Manufacturing Sector Hourly Compensation Costs in 2010 (USD) 12 10 Change in Unit Labor Costs in USD Terms (2005-10) 90% 80% 70% 8 60% 50% 37% 6 4 2 40% 30% 20% 10% 0% -10% 14% 22% -8% -2% 5% 20% 4% -3% 12% -5% 43% 0 Brazil Hugary Poland Mexico Phillippines -20% China South Korea Israel Mexico Poland Brazil Real exchange rate Costs Source: U.S. Bureau of Labor Statistics 21
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 22
Challenges - Infrastructure Infrastructure Ranking Position in 2012-13 Hong Kong Singapore Germany 1 2 3 Chile Russia China 45 47 48 Turkey 51 Mexico Brazil 68 70 India 84 Peru 89 Source: World Economic Forum 23
Challenges - Less Labor, Need More Investment Labor contribution decreases. Growth depends on increasing investments and productivity. GDP grows 3.5%-4.0% throughout the decade. GDP Growth Decreasing Labor Contribution 8% 2,5% Labor Capital Productivity 7% 6% 2,0% 5% 1,5% 4% 4,0% 3% 2,7% 3,2% 1,0% 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 24
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 25
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 26
Conclusion Low global growth scenario, with lower risks (Debt Ceiling and Europe). GDP in Brazil disappointed in 2012, we expect moderate recovery in 2013. Labor market remais heated. Inflation should remain above target. We expect te real to remain depreciated. Exchange rates should remain low for longer. Lower fiscal effort. 27
Long Term Scenario Source: Itaú Unibanco 28