Economic Outlook Macroeconomic Research Itaú Unibanco December, 2016
Roadmap International A tricky scenario unfolds U.S. interest rates will continue to rise and the USD to strengthen as the Trump administration pursues expansionary policies in an economy close to full employment. Emerging markets face the challenge of higher U.S. rates, but broader global financial conditions indicators are well behaved and provide a buffer. Brazil Lower growth, higher risks Third-quarter GDP figures confirmed the weakness of economic activity. We have revised our 2017 growth forecast to 1.5% (down from 2.0%). Fiscal reforms continue to move ahead, however political uncertainty has increased. Inflation continues to fall. Our 2016 IPCA forecast has been revised to 6.5% but remains stable for 2017 at 4.8%. The exchange rate remains close to its sustainable, or equilibrium value. The pace of interest-rate cuts is likely to increase (to 50 bps per meeting) in January. 2
Global Growth: Our Forecasts 2013 2014 2015 2016 2017 World 3.3 3.4 3.2 3.1 3.5 US 1.7 2.4 2.6 1.6 2.2 Euro Area -0.4 0.9 1.6 1.6 1.3 Japan 1.4 0.0 0.6 0.8 1.2 China 7.8 7.3 6.9 6.6 6.3 3 Source: Itaú Unibanco, Haver Analytics
1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 US: interest rates will continue to rise The Trump administration is signaling a big self-financed fiscal stimulus while avoiding, for the time being, major disruptive policies related to trade or immigration. Altogether, we continue to see fiscal expansion (1.1% of GDP within 18 months) speeding up GDP growth, to 2.2% and 2.4% in 2017 and 2018, respectively, up from 1.6% in 2016. This supports our case for a faster tightening cycle by the Fed in the next two years. GDP growth %, annualized rate 5.5% 4.5% 3.5% 2.5% 1.5% 0.5% -0.5% -1.5% 1.6% 2.2% -2.5% Trimestral Anual 4 Source: Itaú Unibanco, Bloomberg, Haver Analytics
1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 Europe: politics dominate the debate Economic indicators have been resilient in Europe. Nonetheless, the need for continued monetary easing is still strong. Political risks still dominate the European scenario, but recent news is not all bad. We raised our GDP forecast for the euro zone to 1.6%, from 1.5%, in 2016 (stronger fourth-quarter data) and kept it at 1.3% for 2017. GDP growth (Eurozone) % 2.5% 2.0% 1.5% 1.6% 1.3% 1.0% 0.5% 0.0% -0.5% -1.0% QoQ Annual 5 Source: Itaú Unibanco, Haver Analytics
1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 China: Stable economic activity; renewed capital outflows Economic activity continues to show steady growth. We expect this growth stability to extend into 2017. Nonetheless, higher interest rates in developed countries and a stronger USD increase the pressure of capital outflows and pose risks to China. Real GDP Growth %, annualized rate 9.0% 8.5% 8.0% 7.5% 7.0% 6.5% 6.0% 5.5% 5.0% 4.5% 4.0% 7.3% 6.9% 6.6% 6.3% QoQ Annual 6 Source: Itaú Unibanco, NBS
LatAm: monetary policy easing amid external volatility As interest rates in the U.S. rise, the South American currencies are expected to weaken some more. In Brazil, Chile, Colombia and Argentina, interest-rate cuts will contribute to the depreciation. Meanwhile, we expect Mexico to appreciate slightly in 2017, as uncertainty over protectionism in the U.S. diminishes only gradually. While we expect a recovery in the region in 2017 (mostly because we expect Argentina and Brazil to come out of their recessions), we see the balance of risks tilted to the downside. Disinflation allows for looser monetary-policy stance. Itaú Surprise Index 1.00 0.80 0.60 Measured as the number of standard deviations from its historical value (3MMA) 0.40 0.20 0.00-0.20-0.40-0.05-0.37-0.60-0.80 Inflation Activity -1.00 May-10 Jul-12 Sep-14 Nov-16 7 Source: Itaú Unibanco, Bloomberg
LatAm: Our Forecasts Peru Mexico 2014 2015 2016 2017 2014 2015 2016 2017 GDP - % 2.4 3.3 3.8 4.0 GDP - % 2.1 2.5 2.1 1.8 PEN / USD (Dec) 2.98 3.41 3.40 3.45 MXN / USD (Dec) 14.7 17.4 20.5 19.5 Interest rate - (Dec) - % 3.50 3.75 4.25 4.25 Interest rate - (Dec) - % 3.00 3.25 5.50 6.00 CPI 3.2 4.4 3.0 2.7 CPI 4.1 2.1 3.4 3.7 Colombia Chile 2014 2015 2016 2017 2014 2015 2016 2017 GDP - % 4.4 3.1 1.8 2.5 GDP - % 1.9 2.3 1.5 2.0 COP / USD (Dec) 2377 3175 3070 3225 CLP / USD (Dec) 606 709 675 685 Interest rate - (Dec) - % 4.50 5.75 7.75 6.00 Interest rate - (Dec) - % 3.00 3.50 3.50 2.50 CPI 3.7 6.8 5.6 4.0 CPI 4.6 4.4 3.0 2.8 Argentina 2014 2015 2016 2017 GDP - % -2.5 2.5-2.4 2.7 ARS / USD (Dec) 8.6 13.0 16.0 19.2 Lebac 35 d (Dec) - % - 33.0 23.75 20.00 CPI - % (Buenos Aires) 38.0 26.9 41.0 22.0 8 Source: Itaú Unibanco
Brazil: What to expect in the short run 2013 2014 2015 2016 2017 Economic Activity GDP (%) 3.0 0.1-3.8-3.3 2.0 Unemployment (%) December (PNAD cont.) 6.8 7.0 10.0 12.5 12.2 Inflation CPI (%) 5.9 6.4 10.7 6.5 4.8 Monetary Policy Selic Rate (%) 10.00 11.75 14.25 13.75 10.00 Fiscal Primary Surplus (% GDP) 1.8-0.6-1.9-2.4-2.2 Balance of Payments Exchange Rate (eop) 2.36 2.66 3.96 3.40 3.60 Current Account (% GDP) -3.0-4.3-3.3-1.2-1.5 9 Source: Itaú Unibanco, Bloomberg, BCB, IBGE
GDP shrank again in 3Q16 On the positive side, the drop in family consumption has decelerated. Additionally, GDP remains below aggregate demand (-1.1% over the past four quarters) because of companies efforts to reduce inventories. Incorporating the 3Q16 GDP figures and a review of the historic series, we expect GDP to remain broadly stable in the fourth quarter of 2016. We have therefore amended our 2016 GDP forecast to -3.3% from - 3.2%. Our diffusion index worsened at the margin. The index continues to suggest that activity will improve as we move ahead, but with less intensity.. GDP Seasonally adjusted index, 1995=100 180 170 160 150 140 130 120 2004.III 2006.III 2008.III 2010.III 2012.III 2014.III 2016.III Diffusion Index 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% Month 0% 3MMA Nov-07 Feb-10 May-12 Aug-14 Nov-16 10 Source: Itaú Unibanco, Bloomberg, BCB, IBGE
2013.I 2013.II 2013.III 2013.IV 2014.I 2014.II 2014.III 2014.IV 2015.I 2015.II 2015.III 2015.IV 2016.I 2016.II 2016.III 2016.IV 2017.I 2017.II 2017.III 2017.IV Modest return to growth in 2017 Weaker short-term GDP, but fundamentals are stable. Commodity prices are likely to increase in 2017 after falling for the past two years. Monetary-policy easing and company deleveraging are likely to provide some relief for aggregate demand. Additionally, inventory normalization should contribute positively to GDP. We have therefore revised our 2017 economic activity growth forecast to 1.5% (2.0% previously). PIB Variação trimestral dessazonalizada 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% -1.0% -1.5% -2.0% -2.5% -3.0% Realizado Projeção -0.9% -2.3% -0.5% 0.5% 0.0% -0.4% -0.8% -1.1% 1.0% 11 Source: Itaú Unibanco, IBGE
Rising trend in unemployment continues In October, a net 75 thousand formal jobs were destroyed (Caged). Without accounting for seasonal effects, the contraction affected 79,000 jobs, a milder decline at the margin than in 1Q16, when 145,000 jobs were destroyed (three-month moving average). In October, the nationwide unemployment rate posted its twenty-third consecutive increase and rose from 11.8% to 12.1%, based on our seasonal adjustment. We have maintained our unemployment forecast of 12.5% for end the year and 12.2% in December of 2017. Unemployment Rate %, s.a. Formal Job Creation Thousands, seasonally adjusted 13 12.5 300 12 12.1 12.2 200 11 10 100 9 0 8 7 6-100 -200-79 5 2012 2013 2014 2015 2016 2017-300 2000 2002 2004 2006 2008 2010 2012 2014 2016 12 Source: IBGE, Itaú Unibanco, MTE
Reforms advance, but political uncertainty increases In December, Congress approved the constitutional amendment that sets a spending cap (PEC 241/55) to government spending. The cap represents a structural change in Brazil s fiscal management. In efforts to continue the structural fiscal adjustment, the government has sent its Social Security reform bill to Congress. Changes to Social Security are essential in order to comply with the spending cap over the next several years.. Social Security expenditure represents 40% of the federal government s total primary expenditure (8.0% of GDP) and will increase in real terms over the next several years as the population ages. Social Security Expense % of central government expenditure 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 65% 50% 40% 2016 2020 2025 13 Source: Itaú Unibanco, National Treasury
The inflation scenario remains positive We are forecasting a 6.5% variation in this year s IPCA, below the 6.8% forecast in our previous report. The announcement that the green tariff flag will be activated in December will have a -0.1 pp impact on December s IPCA. Food-at-home prices have also reacted more favorably than previously expected. We continue to forecast that IPCA inflation will fall to 4.8% in 2017. Next year s drop in inflation will reflect less inflationary inertia, lower inflation expectations, more favorable weather conditions, the high level of idle capacity still seen throughout the economy and a smaller effect from tax increases.. IPCA breakdown YoY 20% 18% 16% 14% yoy IPCA Market-set prices (76%) Regulated prices (24%) 18.1% 12% 10% 8% 6% 4% 10.7% 8.5% 6.5% 4.8% 2% forecast 0% Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 14 Source: Itaú Unibanco, IBGE
The BRL depreciates following the U.S. elections Over the past month, higher U.S. interest rates have pressured emerging-market currencies, including the BRL. The exchange rate reached an intraday peak of BRL 3.54 to the dollar, its highest rate since July this year, but fell back as November progressed. We have maintained our exchange-rate forecast of BRL 3.40 per dollar at the end of 2016 and BRL 3.60 per dollar at the end of 2017. This exchange-rate trend is in line with a scenario of slight growth in current-account deficits, albeit at low levels, not compromising external sustainability. Exchange Rate BRL/USD, end of period Current Account % of GDP, annual 4.50 3% 4.00 3.50 3.00 2.50 3.40 3.34 3.60 2% 1% 0% -1% -2% -3% -1.2% -1.3% -1.5% 2.00-4% 1.50 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17-5% 15 Source: Itaú Unibanco, BCB
BCB opens the door to faster cuts In November, the central bank delivered its second rate cute, another 25-bp move, taking the Selic to 13.75%. We believe that the BCB s communication and our expectations for the economy over the next few months are consistent with our scenario of a faster cycle of interest-rate cuts, starting at the January meeting. We forecast 50-bp cuts throughout 2017 and a final 25-bp cut, with the Selic ending the year at 10.00% p.a. Selic rate % p.a. 15% 14% 13% 13.75% 12% 11% 10% 9% 10.00% 10.83% 8% 7% 2008 2010 2011 2013 2014 2016 2017 Itau Unibanco Forecast Yield Curve Pricing 16 Source: Itaú Unibanco, BCB, Bloomberg
Conclusion International A tricky scenario unfolds U.S. interest rates will continue to rise and the USD to strengthen as the Trump administration pursues expansionary policies in an economy close to full employment. Emerging markets face the challenge of higher U.S. rates, but broader global financial conditions indicators are well behaved and provide a buffer. Brazil Lower growth, higher risks Third-quarter GDP figures confirmed the weakness of economic activity. We have revised our 2017 growth forecast to 1.5% (down from 2.0%). Fiscal reforms continue to move ahead, however political uncertainty has increased. Inflation continues to fall. Our 2016 IPCA forecast has been revised to 6.5% but remains stable for 2017 at 4.8%. The exchange rate remains close to its sustainable, or equilibrium value. The pace of interest-rate cuts is likely to increase (to 50 bps per meeting) in January. 17
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