ECONOMIC OUTLOOK BRAZIL - BBVA Research...contract by 3.0% in 2016. Most recent activity data suggest the risks to this forecast are tilted to downside. BRAZIL ECONOMIC OUTLOOK 4Q2016

BRAZIL ECONOMIC OUTLOOK

4th QUARTER 2016

2

Some recent advances

make the adoption of a

ceiling for public

expenditure more likely. Its

approval by the Congress

would limit fiscal risks and

further spur growth from

2017 on. However, in order

to implement this ceiling

effectively, the government

will need to approve a

social security reform.

We continue to expect the

Brazilian economy to

contract by 3.0% in 2016.

Most recent activity data

suggest the risks to this

forecast are tilted to

downside.

BRAZIL ECONOMIC OUTLOOK │ 4Q2016

We are also maintaining

our 0.9% GDP growth

forecast for 2017.

Recovery will be favored by

factors such as reduced

political uncertainty, lower

inflation and the easing of

monetary conditions.

GLOBAL 4th QUARTER 2016


GLOBAL GROWTH

Global GDP growth

will accelerate slightly

in 2H16

4


Source: BBVA Research

GLOBAL

• The slowdown in goods exports

seems to be bottoming out and

showing signs of improvement

• Retail sales indicate that

consumption continues to show

strength

• Mixed signals on confidence

indicators, although with signs of

recovery in many countries

0.4

0.6

0,8

1,0

Dec-1

1

Jun-1

2

De

c-1

2

Jun-1

3

Dec-1

3

Jun-1

4

Dec-1

4

Jun-1

5

Dec-1

5

Jun-1

6

Dec-1

6

IC 20%

IC 40%

IC 60%

Point estimate

Average for period

GLOBAL GDP GROWTH

Forecasts based on BBVA-GAIN (%, QoQ)

GLOBAL FACTORS

Positive data, but risks still high

5

GLOBAL

Improving activity in

China and emerging countries

Global

trade is

recovering

Relative calm in

financial markets and capital

inflows in emerging ones

Central banks are

supporting growth

Brexit and other

risks in Europe

Political risk in

the USA

Systemic risk

in China

Geopolitics:

Middle East,

Russia

POSITIVE

FACTORS

BUT THE

RISKS ARE

HIGH


GLOBAL SCENARIO

Slight downward revision of growth in Latin America in 2016-17

6

Steady

Down

Up

Source: BBVA Research. Latin America includes: Argentina, Brazil, Chile, Colombia, Mexico, Paraguay, Peru, Uruguay and Venezuela

WORLD 2016 2017

US 2016 2017

LATIN AMERICA 2016 2017

-1.2

SPAIN 2016 2017

EUROZONE 2016 2017

CHINA 2016 2017

GLOBAL

3.0 3.2

1.6 2.1

3,2 2.3

1.6 1.5

6.6 5,8 1.5


7

GLOBAL

WORLD GROWTH

Factors that affect the recovery

Low interest rates are here to

stay, because of cyclical and

structural problems, but not at

such low levels as those of today

Monetary policies are

approaching their limits and are

beginning to outweigh the costs

Fiscal and structural policies

should complement monetary ones

The USA and Germany have room

for expansionary measures, which

are more likely in the US

Other countries have scope to modify

the composition of public

expenditure

The slowdown in global

growth affects trade

The elasticity of trade to GDP

growth is lower than before

the crisis

Central banks

and low interest rates

Coordination of

different policies Global trade


CHINA

Slight upward revision of growth in 2016

8 Source: BBVA Research and IMF

GLOBAL

• Domestic demand strengthened by

new monetary and fiscal stimulus

• The authorities have postponed any

additional monetary measures with a

view to curbing the real estate bubble,

while continuing to move ahead with

macroprudential measures

• Risks remain over the medium term:

‒ Indebtedness of private companies and

lack of reforms in public ones

‒ Real estate market

‒ Capital outflows and exchange rate

‒ Shadow banking

GDP GROWTH

(YoY, %)

7,8

7,36,9 6,6

5,8

3

4

5

6

7

8

9

2013 2014 2015 2016(p) 2017(p)


EURO ZONE

Unchanged forecasts for 2016 and 2017

9

GLOBAL

GDP GROWTH

(YoY, %) • Support of domestic demand,

despite the uncertainty

• End of year downward bias:

uncertainty regarding politics, the

banking system and Brexit, despite

the support of monetary policy

• The ECB has little room for

manoeuvre: QE will most likely be

extended and adjusted

Source: BBVA Research and Eurostat

- 0 . 2

1 . 1

1 . 9

1 . 6 1 . 5

- 0 . 5

0 . 0

0 . 5

1 . 0

1 . 5

2 . 0

2 . 5

2 0 13 2 0 14 2 0 15 2 0 16 (p) 2 0 17 (p)


UNITED STATES

Growth for 2016 revised downwards

10

GLOBAL

GDP GROWTH (%)

(YoY, %) • Reasons:

‒ The indicators suggest insufficiently

strong growth in 2H16 following the

weak first half

‒ Persistently low productivity

• Fed: we expect a rate increase in

December 2016 and two in 2017 up

to 1.25%

• Political risk following the

presidential election

Source: BBVA Research, BEA

0 . 0

0 . 5

1 . 0

1 . 5

2 . 0

2 . 5

3 . 0

3 . 5

1 . 7

2 . 4 2 . 6

1 . 6

2 . 1

2 0 1 3 2 0 1 4 2 0 1 5 2 0 1 6 (p) 2 0 1 7 (p)


BRAZIL 4TH QUARTER 2016


12

BRAZIL

GROWTH PROSPECTS

Unchanged forecasts, but with downside risks for 2016 and upside

risks for 2017

2015 2017 2016


-3.0% -3.8%

0.9%

SHARP GDP CONTRACTION IN 2016

Further growth

deterioration in 1H16

13 Source: BBVA Research and IBGE

BRAZIL

GDP AND PRIVATE CONSUMPTION GROWTH

(% QoQ)

• GDP continued to contract in the first

half of the year, but at a slower pace

than it did during 2015

• The main contributor to GDP

contractions in 1H16 was private

consumption, which offset the

positive contribution to growth of

fixed investment (in 2Q16 but not in

1Q16, thanks to somewhat lower

uncertainty) and mainly of net

exports (thanks to a weaker

currency)


-2.50

-2.00

-1.50

-1.00

-0.50

0.00

1Q15 2Q15 3Q15 4Q15 1Q16 2Q16

GDP PRIVATE CONSUMPTION


Negative consumption dynamics: mainly driven by labor market

14 Source: BBVA Research, IBGE and IPEADATA

BRAZIL

LABOR MARKET: UNEMPLOYMENT RATE AND REAL WAGE GROWTH

• Other drivers:

‒ Credit markets slowdown

‒ Relatively high indebtedness

‒ High inflation (although lower than a

few months ago)

‒ Tight monetary policy

‒ Cuts in public expenditure

‒ Low confidence (although higher than a

few months ago)

‒ High uncertainty (although lower than a

few months ago)


-6

-4

-2

0

2

4

6

8

10

12

Ma

r-1

2

Ma

y-1

2

Jul-1

2

Sep-1

2

No

v-1

2

Jan-1

3

Ma

r-1

3

Ma

y-1

3

Jul-1

3

Sep-1

3

No

v-1

3

Jan-1

4

Ma

r-1

4

Ma

y-1

4

Jul-1

4

Sep-1

4

No

v-1

4

Jan-1

5

Ma

r-1

5

Ma

y-1

5

Jul-1

5

Sep-1

5

No

v-1

5

Jan-1

6

Ma

r-1

6

Ma

y-1

6

Jul-1

6

Sep-1

6

Unemployment rate (%) Real wage growth (% YoY)


GDP to fall again in

3Q16, stabilize in 4Q16

15

* Data until September in the case of industrial

production and until August in the other two cases.

Source: BBVA Research and IBGE

BRAZIL

ECONOMIC ACTIVITY INDICATORS: GROWTH IN 3Q16*

(% QoQ)

• Available data suggest that

economic activity contracted

again in quarterly terms (QoQ) in

3Q16 and that no robust recovery

should be expected in 4Q16

• In fact, recently released indicators

show that 2H16 growth could be

weaker than we are forecasting.

Thus, risks to our -3.0% GDP

forecast for 2016 are tilted to the

downside


-2,5

-2,0

-1,5

-1,0

-0,5

0,0

Economic activity index (IBC-Br)

Industrial production Broad retail sales

POSITIVE GDP GROWTH IN 2017

2017 growth: better than in the three previous years, but still modest

16 (f): forecast


BRAZIL

GDP GROWTH

(%)

BRAZIL ECONOMIC OUTLOOK│ 4Q2016

0.9

4.6

- 0.3 - 0.1

4.3 3.0

-15,0

-12,5

-10,0

-7,5

-5,0

-2,5

0,0

2,5

5,0

7,5

GDP Investment in Fixed Capital

Private Consumption Public Consumption Exports Imports

2014 2015 2016 (f) 2017 (f)


Activity to benefit from lower political uncertainty, higher confidence

17

* Seasonally-adjusted index built on the interest about the term “crise” (crisis in

Portuguese) in Brazil.


BRAZIL

BRAZIL’S CRISIS INDEX

(based on web searches)*

BRAZIL ECONOMIC OUTLOOK│ 4Q2016

CONFIDENCE INDEXES

Source: BBVA Research, FECOMERCIO and CNI

30

40

50

60

70

80

90

Ja

n-1

1

Ma

y-1

1

Sep-1

1

Ja

n-1

2

Ma

y-1

2

Se

p-1

2

Ja

n-1

3

Ma

y-1

3

Se

p-1

3

Ja

n-1

4

Ma

y-1

4

Se

p-1

4

Ja

n-1

5

Ma

y-1

5

Se

p-1

5

Jan-1

6

Ma

y-1

6

Se

p-1

6

30

40

50

60

70

80

90

Jan-1

2

Apr-

12

Jul-12

Oct-

12

Jan-1

3

Apr-

13

Jul-13

Oct-

13

Jan-1

4

Apr-

14

Jul-14

Oct-

14

Jan-1

5

Apr-

15

Jul-15

Oct-

15

Jan-1

6

Apr-

16

Jul-16

Oct-

16

Business confidence index Consumer confidence index


Financial markets’ rebound also supports recovery view

18 * Data until November 3, 2016. Positive variations represent exchange rate depreciations.

Source: BBVA Research and HAVER Analytics

BRAZIL

BRAZILIAN FINANCIAL ASSETS

(% changes)*


• Financial markets continued to recover

from previous losses in the last three

months

• On the one hand, these gains are related

to external factors: lower concerns on

China, higher commodity prices and

mainly the gradualism in the

normalization of monetary conditions

in the US

• On the other hand, the ongoing rebound

in asset prices is related to the

reduction of the “political noise” (which

remains high) and the generalized

perception that the worst of the

domestic crisis is behind us Last three months Since the end of 2015

-40

-30

-20

-10

0

10

20

30

40

50

Exchange rate (BRL/USD)

Sovereign spread (EMBI)

Sao Paulo Stock Exchange Index

19

BRAZIL


The approval of the fiscal reform should help to pave the way for

activity recovery in 2017

Fiscal reform to be

approved soon

It should reduce fiscal risks

and spur growth However…

Somewhat surprisingly, the

government has been able to get

the Congress to support the bill

that imposes a cap on fiscal

expenditure for 20 years (by

ensuring that it will remain constant

in real terms)

It was approved by the Chamber

of Deputies and will likely be

approved by the Senate soon

Getting the fiscal reform approved

would be an important step

towards ensuring the

stabilization and eventual

reduction of public debt in the

long term

In fact, the approval of the fiscal

reform could prompt a faster-

than-expected recovery of

activity from 2017 on

To be able to implement the new

fiscal rule, the government will

need to approve a social security

reform. A bill will likely be sent to

Congress in the next few months

Even if fiscal and social security

reforms are approved, fiscal

accounts will continue to worsen

significantly in the short-term (see

the forecast table at the end of this

report)



Inflation will continue to trend downwards moving forward

20 Source: BBVA Research and IBGE

BRAZIL

INFLATION (IPCA)

(% YoY)


• We expect inflation to reach 7.0% at the end of

2016 and converge to the 4.5% target in 2017

(our previous forecasts were 6.8% and 4.5%,

respectively)

• Main drivers of the slowdown:

‒ Recent currency appreciation

‒ Lack of demand pressures

‒ Smaller adjustments in regulated prices

• The reduction of inflation will have a positive

impact on disposable income. Moreover, it will

create room for an easing of monetary

conditions which should further push economic

activity next year

0,0

2,0

4,0

6,0

8,0

10,0

12,0

Ja

n-1

5

Ma

r-1

5

Ma

y-1

5

Ju

l-1

5

Se

p-1

5

No

v-1

5

Ja

n-1

6

Ma

r-1

6

Ma

y-1

6

Ju

l-1

6

Se

p-1

6

No

v-1

6

Ja

n-1

7

Ma

r-1

7

Ma

y-1

7

Ju

l-1

7

Se

p-1

7

No

v-1

7

target range


A moderate monetary

easing cycle ahead

21

Source: BBVA Research and BCB

BRAZIL

SELIC RATE

(%)

• The BCB cut the Selic by 25 bps to

14.0% in Oct/16, after maintaining it

unchanged since Jul/15. The decision,

which occurred somewhat earlier than we

expected, followed the inflation slowdown

and the anchoring of expectations (now

around 5.0% for 2017 and 4.5% for the

following years)

• We expect a 50 bp cut in Nov/16 (but

another 25bp cut should not be ruled out)

and the Selic to reach 11.50% in 1H17

• The BCB commitment to keep inflation

around 4.5% and the tightening of the US

monetary conditions should help to

prevent a more sizable easing cycle


6

7

8

9

10

11

12

13

14

15

Mar-

13

Jun-1

3

Sep-1

3

Dec-1

3

Mar-

14

Jun-1

4

Sep-1

4

De

c-1

4

Mar-

15

Jun-1

5

Sep-1

5

Dec-1

5

Mar-

16

Jun-1

6

Sep-1

6

Dec-1

6

Mar-

17

Jun-1

7

Sep-1

7

Dec-1

7


The external adjustment

is mostly over

22 (f): forecast

Source: BBVA Research and BCB

BRAZIL

CURRENT ACCOUNT

(% GDP)

• We expect the current account to

remain relatively stable from now

on, after the sharp adjustment it

went through (from -4.4% of GDP in

Dic/14 to -1.3% of GDP in Sep/16)

• That would contribute to the

stabilization of the Brazilian real

(BRL), which however we expect to

depreciate somewhat going forward

(thus favoring exports) as the spread

between domestic and foreign

interest rates will decrease

• More precisely, we expect the BRL

to close 2016 at 3.34 and average

3.43 in 2017 (vs. 3.49 in 2016)


-5,0

-4,5

-4,0

-3,5

-3,0

-2,5

-2,0

-1,5

-1,0

-0,5

0,0

2010 2011 2012 2013 2014 2015 2016 (f) 2017 (f)

23

Forecasts Table

BRAZIL

2014 2015 2016 (f) 2017 (f)

GDP (%) 0.1 -3.8 -3.0 0.9

Private consumption (%) 1.3 -4.0 -4.3 -0.3

Public consumption (%) 1.2 -1.0 -1.4 -0.1

Fixed capital investment (%) -4.5 -14.1 -7.8 4.6

Exports (%) -1.1 6.1 7.3 4.3

Imports (%) -1.0 -14.3 -8.9 3.0

Unemployment rate (average) 6.8 8.3 11.3 11.7

Inflation (eop, YoY %) 6.4 10.7 7.0 4.5

Selic interest rate (eop, %) 11.75 14.25 13.50 11.50

Exchange rate (eop) 2.66 3.80 3.34 3.49

Fiscal result (% of GDP) -6.1 -10.2 -9.7 -8.7

Gross public debt (% of GDP) 57.2 66.2 72.1 76.9

Current account (% of GDP) -4.3 -3.3 -1.1 -1.0


(f): forecast; (eop): end of period

Source: BBVA Research

Documents

ECONOMIC OUTLOOK BRAZIL - BBVA Research...contract by 3.0% in 2016. Most recent activity data suggest the risks to this forecast are tilted to downside. BRAZIL ECONOMIC OUTLOOK 4Q2016