Brazil Economic Outlook - 1Q19 - BBVA Research
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BBVA Research – Brazil Economic Outlook 1Q19 / 1 Brazil Economic Outlook 1Q19 January 2019
Main messages The Brazilian economy will grow 2.2% in 2019 and 1.8% in 2020, stimulated by factors such as the expansive tone of monetary policy and the increase in confidence. However, prospects for growth recovery are now less positive, mainly due to the view that the global environment will be less favorable than previously expected We maintain the view that the new government will take measures to curb fiscal deterioration, including a reform of social security, which, however, would not be ambitious enough to trigger a better-than-expected macroeconomic scenario Inflationary pressures will continue to rise, mainly from the middle of 2019 onwards, reflecting the relative strengthening of demand as well as the exchange rate depreciation. In any case, the balance of risks for inflation has improved, which has created room for the central bank to postpone until the end of this year the beginning of the monetary tightening
BBVA Research – Brazil Economic Outlook 1Q19 / 3
Índice
01 Global environment: moving towards a soft-landing
of global growth, amid high uncertainty
02 Brazil: the economy will grow 2.2% in and 1,8% in 2020
03 Brazil: forecast tableBBVA Research - Brazil Economic Outlook 1Q19 / 4
01
Global environment:
moving towards a soft-landing of
global growth, amid high uncertaintyBBVA Research – Brazil Economic Outlook 1Q19 / 5
Global GDP will likely recover somewhat in 4Q18,
but the trend is clearly downwards
World GDP growth
(Forecast based on BBVA-GAIN, % QoQ)
Global growth is decelerating,
1.2 but it remains solid
1.2
The generalized deterioration of
industrial production and trade
1.0 suggest a more evident impact of
1.0 protectionism
The strong moderation of industrial
0.8 confidence extends to other
0.8
sectors, but the growth of private
spending remains
0.6
0.6 The high uncertainty continues at the
beginning of the year and will continue
to weigh on the growth
0.4
0.4
Dec-13
Dec-14
Dec-15
Dec-16
Dec-17
Dec-18
Jun-14
Jun-15
Jun-16
Jun-17
Jun-18
Dec-13
Dec-14
Dec-15
Dec-16
Dec-17
Dec-18
Jun-14
Jun-15
Jun-16
Jun-17
Jun-18
CI 20% CI 40% CI 60%
Point Estimates Period average
Source: BBVA ResearchBBVA Research – Brazil Economic Outlook 1Q19 / 6
Global trade: effect of both increased tariffs and uncertainty
on trade negotiations are now more evident
BBVA – Global exports of goods
(% YoY, 3-period moving average, nominal exports)
World trade has shown strong volatility
10 due to uncertainty about trade
disputes
9
The recent poor performance of
8 exports in China is partly due to the
previous front-loading of exports
7
triggered by the possibility of new tariff
6 increases, but its downward trend is
worrying
5
The worse-than-expected evolution of
4 exports has also been observed in the
rest of Asia and in Germany
3
2
1
0
Nov-11
Nov-12
Nov-13
Nov-14
Nov-15
Nov-16
Nov-18
Nov-17
May-12
May-13
May-14
May-15
May-16
May-17
May-18
Source: BBVA ResearchBBVA Research – Brazil Economic Outlook 1Q19 / 7
Lower oil prices could drive global growth up by
between one and two tenths in 2019-20
Oil prices
(Brent, USD per barrel)
• Oil prices may recover in the short
120 120 term due the announced production
cuts
110 110
100 100 • However, the growing production in
the US and lower global demand will
90 90 push prices downwards more than
expected throughout 2019-20
80 80
70 70 • The fall in prices will benefit world
growth, but the effect on some Latam
60 60 countries will be negative
50 50
• Copper forecasts were revised
40 40 downwards, due to lower world
growth, while soybean forecasts were
30 30 adjusted upwards, due to the
20 20
prospects for relaxation in the China -
Nov-14
Nov-15
Nov-16
Nov-17
Nov-18
Nov-19
Nov-20
Mar-14
Mar-15
Mar-16
Mar-17
Mar-18
Mar-19
Mar-20
Jul-14
Jul-15
Jul-16
Jul-17
Jul-18
Jul-19
Jul-20
US trade relationship
Jul-14
Jul-15
Jul-16
Jul-17
Jul-18
Jul-19
Jul-20
Mar-14
Mar-15
Mar-16
Mar-17
Mar-18
Mar-19
Mar-20
Nov-14
Nov-15
Nov-16
Nov-17
Nov-18
Nov-19
Nov-20
Previous
oct-18 forecasts (Oct/18)
Jan-19 Current forecasts
Source: BBVA ResearchBBVA Research – Brazil Economic Outlook 1Q19 / 8
Recent turmoil in the financial markets due to a risk
of a sudden adjustment of global growth
BBVA’s Financial Tensions Index
(Índex)
01 02
1.5 Developed markets (US) EM remained relatively
are at the center of the resilient despite the
episode, where financial global mood and the fall
1.0
tensions have rebounded in oil prices
sharply
0.5
03 04
0.0 Investors have The response of
withdrawn sizeable central banks,
outflows from DM, but particularly the Fed
-0.5 EMs have failed to showing higher
attract new flows prudence/patience, has
been key to halt tensions
-1.0
-1.5
Sep-13
Sep-14
Sep-15
Sep-16
Sep-17
Sep-18
May-13
May-14
May-15
May-16
May-17
May-18
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Jan-18
Jan-19
Emerging Markets Developed Markets
Source: BBVA ResearchBBVA Research – Brazil Economic Outlook 1Q19 / 9
Still soft landing, but more uncertain due
to dependence on policies
Worse macro outcomes Higher financial stress
Faster slowdown than expected Risks of global growth hard landing
(Protectionism+China)
Tougher financial conditions
Evidence that impact from US fiscal stimulus will
fade earlier than expected
Three key assumptions in our projections:
01 02 03
Easing US-China trade Orderly Brexit Fed and ECB: more
tensions with no dovish and with
changes in the auto more room of
sector maneuverBBVA Research – Brazil Economic Outlook 1Q19 / 10
Widespread downward revision of growth, with moderation
more evident in developed and emerging Asian countries
US Eurozone
2019 2020 2019 2020
China
2.5 2.0 1.4 1.4
2019 2020
Mexico 6.0 5.8
2019 2020
2.0 2.2
Turkey
Latam
2019 2020
World
2019 2020
1.0 2.5
2019 2020
2.1 2.4 Upward revison
Remains unchanged
3.5 3.4
Downward revision
Source: BBVA ResearchBBVA Research – Brazil Economic Outlook 1Q19 / 11
US: further growth slowdown due to the fading
of fiscal stimulus and financial volatility
US: GDP growth
(% a/a)
A downward revision of GDP due to
less optimistic prospects for private
Current Previous investment and public spending
Private consumption will moderate
following lower taxes’ fading effects,
and despite the strength of the labor
market
2.9%
2.8% Inflation remains above the target, but
2.5% will gradually converge to below-the-
2.2% 2.8% target levels in 2020
2.0%
The downside risks have increased
1.6% due to the deterioration of the global
environment; the risk of recession in
the two-year horizon is also greater
2016 2017 2018 2019 (f) 2020 (f)
(f) Forecast.
Source: BBVA Research , based on BEA dataBBVA Research – Brazil Economic Outlook 1Q19 / 12
China: policy priority is to avoid a hard-landing scenario
China: GDP growth
(%)
Growth forecasts are maintained
unchanged due to greater policy-
Current Previous stimuli
Supportive fiscal and monetary
measures are being extended, but
attempts are made not to worsen
6.8%
existing financial vulnerabilities
6.7% 6.6% Protectionism remains the main
6.5% risk. If its effects trigger additional
6.0% stimuli, and the necessary
6.0% 5.8% deleveraging is slowed down, then
a sharp depreciation of the
exchange rate could be observed
2016 2017 2018 2019 (f) 2020 (f)
(f) Forecast.
Source: BBVA Research, based on CEIC dataBBVA Research – Brazil Economic Outlook 1Q19 / 13
Global risks tilted to the downside: US recession fears, China’s
debt and trade war are the main sources of concerns
Economic recession: increasing (trade concerns, political
controversy -shutdown-, geopolitical issues, credit risk /
corporate leverage)
Protectionism: high. Negative spillovers on growth
(investment, impact on certain sectors / states) and cost
pressures
US Fed’s exit: falling. Lower risk of overshooting (rates above
CHN neutral levels)
Disorderly deleveraging: relatively higher. Growing debt
- Short-term probability +
EZ overhang amidst further stimulus and flagging growth (also
visible in household expenditure). Monitoring: RMB, corporate
defaults, local government debt
Protectionism: high. Big differences remain despite a potential
trade deal in March19. Lack of advances in structural issues
(intellectual property, FDI, WTO reform)
Political concerns: relatively higher. Lack of advances in
integration process on the eve of European Parliament elections
• Brexit: risk of a cliff-edge Brexit in March19
• Italy: political and policy uncertainty remains. Banking
- Severity (at global level) + concerns rising
Proteccionism: contained but it could be not discarded (autos)
ECB’s exit risk: low. Pending on changes in the Board
Source: BBVA ResearchBBVA Research - Brazil Economic Outlook 1Q19 / 14
02Brazil:
the economy will grow 2.2%
in and 1,8% in 2020BBVA Research – Brazil Economic Outlook 1Q19 / 15
The government of Jair Bolsonaro begins, with
optimism regarding the evolution of the economy
Confidence indicators: cumulative increase
between September and December 2018
(Base-points change) Confidence in the economy has increased
significantly
45
Financial markets are also more
40 optimistic, mainly due to the liberal agenda
introduced by the new administration,
35 which includes proposals for trade
liberalization, fiscal adjustment, economic
30
reforms, privatizations, etc.
25
Since September, the Sao Paulo Stock
20 Exchange index increased 20% and the
exchange rate appreciated around 10%
15
Greater confidence will continue to favor
10 recovery
5 However, optimism with the new
government will hardly remain at such
0
Confidence in the Business Consumer high levels, among other reasons because
improvement of the confidence confidence difficulties to approve reforms, with a
economy (*) fragmented and polarized congress, could
be higher than anticipated
(*) Increase in the proportion of the population that expects the economy to improve in the
coming months, according to Datafolha surveys.
Source: Datafolha, FGV, Fecomercio, BBVA ResearchBBVA Research – Brazil Economic Outlook 1Q19 / 16
The most likely is that a social security reform will be approved,
reducing, but not eliminating, fiscal problems
Base Positive Negative
scenario alternative scenario alternative scenario
Social security A not very ambitious social An ambitious social security A reform of social security is not
reform security reform is approved reform is approved approved
Public debt continues to rise,
although less than in recent The conditions for public debt to
Public debt continues to
Fiscal outlook years; new significant fiscal trend down in the medium term
increase significantly
adjustments will become are given
necessary
Stagnation or even a new
GDP growth converges to 3%
Macroeconomic recession, in a context of
GDP growth converges to 2% or even more if other economic
outlook growing doubts about the debt
reforms are approved
sustainability
Probability 60% 25% 15%BBVA Research – Brazil Economic Outlook 1Q19 / 17
We maintain our view on the local drivers of growth, but we revise GDP
forecasts downwards due to a less favorable global environment
2.4 %
2.2 %
(before)
(now) 2.0 %
1.8 %
(before)
1.2 %
(now)
(unchanged)
2018 2019 2020
We keep our estimate for 2018 GDP growth The 0.2 pp downward adjustments in our forecasts for 2019
unchanged at 1.2%, which would follow an expansion and 2020 are due to global factors: lower global growth,
of 1.1% in 2017 and the 7% GDP contraction higher financial volatility (mainly in the first half of 2019)
accumulated between 2015 and 2016 and lower commodity pricesBBVA Research – Brazil Economic Outlook 1Q19 / 18
Growth in 2019 and 2020 will be supported mainly
by the expansion of investments and exports
Growth of GDP and its components(*)
(%)
7.5
5.0
2.5
0.0
-2.5
GDP Investment Private consumption Public consumption Exports Imports
2018 (p) 2019 (f) 2020 (f)
(*) (f) Forecasts
Source: BBVA Research
Expansive monetary policy and the increase in confidence The depreciated exchange rate
will stimulate the performance of private consumption and will continue to favor net exports
investment, mainly in 2019 in the coming yearsBBVA Research – Brazil Economic Outlook 1Q19 / 19
Inflation will continue to rise, but less than
previously expected
Inflation (*) Inflation closed 2018 at 3.8%, below both
(y/y %; end-of-period) the expected level and the 4.5% target for
the period
7
We anticipate that inflationary pressures
6
will increase further, mainly from the
second half of 2019 onwards, in line with
the depreciation of the exchange rate, the
5 relative strengthening of demand and
greater pressures from food prices
4
Inflation would reach 4.5% at the end of
2019 and 4.9% at the end of 2020, above
3 the inflation targets (4.25% in 2019 and
4.0% in 2020)
2 This scenario for inflation is more benign
than the one we had before as it
1
incorporates the recent downward
surprises in inflation figures, prospects of
lower oil prices and weaker domestic
0 demand forecasts
2016 2017 2018 2019 (f) 2020 (f)
Current forecasts Previous forecasts (Oct/18)
(*) (f) = Forecasts.
Source: BCB, BBVA ResearchBBVA Research – Brazil Economic Outlook 1Q19 / 20
The better prospects for inflation will postpone the beginning
of the monetary adjustment cycle
Interest rates: SELIC (*) With lower inflationary pressures and
(y/y %; end-of-period) the prospect of a more gradual
normalization of monetary policy in
16
developed countries, the central bank
now has room to postpone the
14 beginning of the monetary tightening
cycle
12
More precisely, we expect the SELIC
10
rate to start to be adjusted upwards in
the second half of 2019, when inflation
and expectations will likely be above
8
the targets
6 The monetary policy reference rate
(SELIC) would converge to 8.0% at
4 the end of this year and to 9.0% in 2020
2
0
2016 2017 2018 2019 (f) 2020 (f)
Current forecasts Previous forecasts (Oct/18)
(*) (f) = Forecasts.
Source: BCB, BBVA ResearchBBVA Research – Brazil Economic Outlook 1Q19 / 21
Primary fiscal deficits will decline but will continue to be a source of
concerns, while external deficits will increase but will remain under control
Primary balance and current account (*) Primary fiscal deficits will trend down,
(% of GDP) thanks to the effect on revenue of higher
GDP growth, a strict control of
4,0 4.0
expenditures and one-off revenues
3,0 3.0
Still, the adjustment of the fiscal balance
2,0 2.0
ahead will be too slow
In the coming years, the country will
1,0 1.0
continue to produce primary deficits,
0,0 0.0 which coupled with high interest
payments will continue to prevent a clear
-1,0 -1.0 improvement of the overall fiscal result
and public debt, at least if a more
-2,0 -2.0 ambitious social security reform is not
approved
-3,0 -3.0
With respect to the current account
-4,0 -4.0
deficit, a gradual increase is expected in
-5,0 -5.0
the coming years, but external accounts
will continue to be no source of worry
(f)
(f)
2020 (f)
2011
2012
2013
2014
2015
2016
2017
2013
2014
2011
2012
2015
2016
2017
(f)
2018 (f)
2019 (f)
2018
2019
2020
Current account
Saldo por Cuenta Corriente Total fiscal
Saldoresult
fiscal primario
(*) (f) Forecasts.
Source: BCB, BBVA ResearchBBVA Research – Brazil Economic Outlook 1Q19 / 22
The exchange rate will remain slightly more appreciated during the next
few months, but by the middle of the year it will start to depreciate again
Nominal exchange rate (*) After depreciating strongly between April
(Brazilian real/ US dollar) and September, the exchange rate
appreciated around 10% in line with
4.3
global markets and greater optimism
with the Bolsonaro government
4.1
The honeymoon of the financial markets
3.9 with the new government will help to
maintain the exchange rate relatively
3.7
appreciated in the coming months,
despite the fact that in this period global
3.5
volatility will remain high
3.3 However, starting in the middle of the
year, the exchange rate will possibly
3.1
begin to depreciate, as the difficulties in
the approval of the reforms (especially
2.9
the social security one) become more
evident and in line with the expected
2.7
moderation in commodity prices
2.5
Jan-15
Jun-15
Jan-20
Jun-20
Apr-16
Jul-17
May-18
Oct-18
Nov-15
Dec-17
Nov-20
Sep-16
Aug-19
Mar-19
Feb-17
(*) Forecasts from January 2019 on.
SourceBBVA ResearchBBVA Research - Brazil Economic Outlook 1Q19 / 23 03 Brazil: forecast table
BBVA Research – Brazil Economic Outlook 1Q19 / 24
Brazil forecasts
2017 2018 (f) 2019 (f) 2020 (f)
GDP 1.1 1.2 2.2 1.8
Private consumption (%) 1.3 1.9 1.7 1.6
Public consumption (%) -0.9 0.0 -1.1 -0.9
Investment in fixed capital (%) -2.5 4.9 6.5 4.1
Exports (%) 5.7 1.8 4.5 4.1
Imports (%) 5.5 9.3 4.3 3.0
Unemployment rate (average) 12.7 12.2 11.1 10.0
Inflation (end of period, YoY %) 2.9 3.8 4.5 4.9
SELIC rate (end of period,YoY %) 7.00 6.50 8.0 9.0
Exchange rate (end of period) 3.30 3.88 4.05 4.05
Current account (% of GDP) -0.3 -0.3 -0.8 -1.5
Public sector primary balance (% of GDP) -1.7 -1.9 -1.4 -1.0
(*) (f) Forecasts.
Source: BCB, BBVA ResearchYou can also read
