españ - bbva research · the results are significant at a 5% level for argentina, brazil,...

Situación España 1T16

• Españ

Situación

Brazil Economic Outlook

2nd QUARTER

2016

Brazil Economic Outlook / 2nd Quarter 2016

GDP will fall around 3.0% in 2016, driven by a contraction of around 6% in the

domestic demand

We expect positive GDP growth in 2017, but activity recovery will be slow, in

line with our estimates showing potential growth of just 1%

Inflation slowdown and current account improvement will bring some relief,

while fiscal concerns will continue

Economic activity will continue to weaken while the political environment

should remain turbulent

Main messages


Global Global environment: fragile and China-dependent growth


Global environment: fragile and China-dependent growth

World GDP (QoQ%). Forecasts for 1Q16 and 2Q16 based on BBVA-GAIN World GDP accelerated somewhat and

financial tensions eased in the last few

months…

…as concerns about China and US

monetary policy lessened.

World growth is expected to continue to

accelerate gradually, but to remain fragile

and dependent mainly on the evolution of

China

Source: BBVA Research

0,4

0,6

0,8

1,0

1,2

1,4

1,6

Jun

-09

Dec-0

9

Jun

-10

Dec-1

0

Jun

-11

Dec-1

1

Jun

-12

Dec-1

2

Jun

-13

Dec-1

3

Jun

-14

Dec-1

4

Jun

-15

Dec-1

5

Jun

-16

average 2000-07

average 2010-15


Brazil Economic activity will contract sharply in 2016 and recover

timidly in 2017


Michel Temer’s approval rating (%)

The political environment is expected to remain turbulent

Following recent decision by the Congress, President Rousseff stepped aside and Vice-President Michel Temer assumed presidential duties.

Once the doubts about who will govern the country have been mostly cleared up, we see some room for domestic uncertainty to fall.

However, we expect political tensions to remain high for many reasons: i) it is not clear whether the new administration will have the needed support to govern, ii) ongoing corruption scandals, iii) economic crisis, iv) fierce opposition, etc.

0

10

20

30

40

50

60

70

80

90

100

February 2016 April 2016

Disapprove him Approve him Does not know him

Source: Ipsos


Confidence indices

GDP to contract in 1H16 (not as much as in 2H15), stabilize in

2H16 and be back into positive territory in 2017

GDP growth (QoQ%)

Confidence levels could increase, but are expected to remain at

low levels

Economic recovery is likely to be slow, as political turbulence and fiscal concerns will continue

30

40

50

60

70

80

90

Ma

r-9

9

Jan

-00

Nov-0

0

Se

p-0

1

Jul-

02

Ma

y-0

3

Ma

r-0

4

Jan

-05

Nov-0

5

Se

p-0

6

Jul-

07

Ma

y-0

8

Ma

r-0

9

Jan

-10

Nov-1

0

Se

p-1

1

Jul-

12

Ma

y-1

3

Ma

r-1

4

Jan

-15

Nov-1

5

Business confidence index Consumer confidence index

-3

-2

-1

0

1

2

2Q

13

3Q

13

4Q

13

1Q

14

2Q

14

3Q

14

4Q

14

1Q

15

2Q

15

3Q

15

4Q

15

1Q

16

2Q

16

3Q

16

4Q

16

1Q

17

2Q

17

3Q

17

4Q

17

Source: CNI, Fecomercio and BBVA Research Source: BBVA Research


Brazil’s GDP, terms of trade and world’s GDP (% growth)

GDP growth: contributions of domestic and foreign demand

GDP is expected to decrease 3.0% in 2016 and grow by 0.9% in 2017

-15

-10

-5

0

5

10

15

20

-6

-4

-2

0

2

4

6

8

10

199

8

199

9

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

201

4

201

5(f

)

201

6(f

)

201

7(f

)

GDP World GDP Terms of trade (right)

-8

-6

-4

-2

0

2

4

6

8

10

199

8

199

9

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

201

4

201

5

201

6

201

7

Domestic demand Foreign demand GDP

Moreover, the economy will benefit from a mild decline in domestic

uncertainty, a slowdown in inflation, a less contractive monetary

policy, etc

Global environment is likely to be more supportive in 2017

Source: IMF and BBVA Research Source: IBGE and BBVA Research


Potential output by contributors Current potential GDP estimates for 2006-2010, 2011-2015 and 2016-2020 and previous (2015) estimates for the 2016-2020 period

Low growth scenario is reinforced by estimates showing that potential GDP has fallen to just 1.0%

3,4

2,02,2

1,1

-1,0

-0,5

0,0

0,5

1,0

1,5

2,0

2,5

3,0

3,5

4,0

2006-2010(current)

2011-2015(current)

2016-2020(previous)

2016-2020(current)

Capital Labor TFP Pot. GDP

-2

0

2

4

6

8

10

196

6

196

9

197

2

197

5

197

8

198

1

198

4

198

7

199

0

199

3

199

6

199

9

200

2

200

5

200

8

201

1

201

4

201

7

202

0

202

3

Capital Labor TFP Pot. GDP

Reforms (tax system, labor system, social security, trade

liberalization, political system, etc) could trigger a faster than

expected recovery of potential GDP

Due to lower contributions from capital, labor and productivity,

potential GDP has fallen significantly.

Source: BBVA Research Source: BBVA Research


Inflation: headline, food, regulated and service (YoY %)

Headline inflation: observed and forecasts (YoY %, end of quarter)

Domestic demand deceleration is finally affecting inflation more significantly

6

9

12

15

18

Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16

Food Regulated Service Headline

8,1

8,9

9,5

10,7

9,4

8,48,0

6,8

5,7 5,4

5,0 4,5

0

2

4

6

8

10

12

1Q

15

2Q

15

3Q

15

4Q

15

1Q

16

2Q

16

3Q

16

4Q

16

1Q

17

2Q

17

3Q

17

4Q

17

target range

Recent inflation moderation reinforces our forecasts that inflation

will fall to 6.8% in 2016 and 4.5% in 2017.

The main drivers of the slowdown are (and will continue to be)

the smaller adjustments in regulated prices and the contraction

of domestic demand.

Source: BCB and BBVA Research Source: BCB and BBVA Research


Persistence of headline inflation: based on the estimation of a Phillips curve (Jan/04-Mar/16)*

Persistence of core inflation: based on the estimation of a Phillips curve (Jan/04-Mar/16)*

Relatively high inertia in Brazil is one of the obstacles for inflation to slow down more significantly

0,0

0,2

0,4

0,6

0,8

1,0

ARG BRA CHI COL MEX PER URU

0,0

0,2

0,4

0,6

0,8

1,0

ARG BRA CHI COL MEX PER URU

…reinforcing our view that inflation will only converge to the

targets next year.

Different inertia measures show that inertia in Brazil is relatively

high…

* Due to data issues, the sample for Argentina starts in August 2006. The results

are significant at a 5% level for Argentina, Brazil, Colombia, Peru and Mexico and

at 10% for Chile.


* Due to data issues, the samples for Argentina and Uruguay start in April 2008 and

January 2011, respectively. The results are significant at a 5% level for Argentina,

Brazil, Colombia and Mexico and at a 10% level for Peru and Uruguay.



Inflation expectations: market consensus for next 12 months, end of 2016 and end of 2017 (YoY %)

Selic interest rate (%)

Inflation slowdown brings some relief, but the time for a monetary easing has not arrived yet

4,0

4,5

5,0

5,5

6,0

6,5

7,0

7,5

8,0

Jan

-15

Fe

b-1

5

Ma

r-1

5

Ap

r-15

Ma

y-1

5

Jun

-15

Jul-

15

Au

g-1

5

Se

p-1

5

Oct-

15

No

v-1

5

Dec-1

5

Jan

-16

Fe

b-1

6

Ma

r-1

6

Ap

r-16

Ma

y-1

6

2016 2017 Next 12 months

6

7

8

9

10

11

12

13

14

15

Ma

r-1

3

Jun

-13

Se

p-1

3

Dec-1

3

Ma

r-1

4

Jun

-14

Se

p-1

4

Dec-1

4

Ma

r-1

5

Jun

-15

Se

p-1

5

Dec-1

5

Ma

r-1

6

Jun

-16

Se

p-1

6

Dec-1

6

Ma

r-1

7

Jun

-17

Se

p-1

7

Dec-1

7

Although the possibility of a new BCB governor being appointed

soon increases uncertainty, we expect monetary easing to begin

only next year

Inflation expectations have fallen lately, but a further decline is

needed for the BCB to start to cut the Selic rate



Fiscal indicators: primary balance, interest payment and gross public debt (% of GDP)

We remain skeptical about a short-term solution to the fiscal crisis

Although the new administration seems willing to address fiscal matters, we are skeptical about its ability to approve a significant social security reform and to effectively reduce the degree of rigidity of public expenses

Therefore, we expect public accounts to continue to worse and fiscal risks (debt crisis, fiscal dominance, etc) to remain in place

The gross public debt is forecast to jump from 66% of GDP in 2015 to 72% in 2016 and 75% in 2017. -14,0

-10,5

-7,0

-3,5

0,0

3,5

7,0

50

55

60

65

70

75

80

200

8

200

9

201

0

201

1

201

2

201

3

201

4

201

5

201

6(f

)

201

7(f

)

Primary result (right) Interest payment (right) Public debt (left)

Source: BCB and BBVA Research


Commodity prices (CRB index), equity markets (BOVESPA), sovereign spreads (EMBI +) and exchange rate (USD/BRL). Indexes: figures as of July 20, 2015 =100.

Financial markets: after the storm comes the calm; and then another storm?

80

90

100

110

120

130

140

60

80

100

120

140

160

180

200

Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16

BRL BOVESPA EMBI Commodities (right)

Local financial assets recovered in the last months the losses recorded during the second half of 2015, in line with commodity prices

dynamics. We expect financial turbulence to remain high.

* Higher values represent a weaker Brazilian real, a higher BOVESPA index and a higher sovereign spread. Data until May 11.

Source: Datastream, CRB and BBVA Research


Exchange rate: Brazilian real per USD dollar (nominal and real rates)

Current account (% of GDP)

The exchange rate is likely to depreciate and the current account deficit is expected to ease furthermore

1,5

2,0

2,5

3,0

3,5

4,0

4,5

Jan

-13

Ap

r-13

Jul-

13

Oct-

13

Jan

-14

Ap

r-14

Jul-

14

Oct-

14

Jan

-15

Ap

r-15

Jul-

15

Oct-

15

Jan-1

6

Ap

r-16

Jul-

16

Oct-

16

Jan

-17

Ap

r-17

Jul-

17

Oct-

17

Nominal Exchange rate Real exchange rate

-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 1Q16 2016(f) 2017(f)

…support the view that the BRL will weaken, helping CA deficit to

decline, which will further reduce the risk of a balance-of-payments

crisis.

Global volatility due to concerns on China and US monetary

policy and our view that fiscal and political issues will continue

to weigh negatively…



GDP will fall around 3.0% in 2016, driven by a contraction of around 6% in the

domestic demand

We expect positive GDP growth in 2017, but activity recovery will be slow, in

line with our estimates showing potential growth of just 1%

Inflation slowdown and current account improvement will bring some relief,

while fiscal concerns will continue

Economic activity will continue to weaken while the political environment

should remain turbulent

Main messages


Annex


Forecasts

Macroeconomic forecasts

2014 2015 2016 2017

GDP (% growth) 0.1 -3.8 -3.0 0.9

Inflation (% YoY, end of period) 6.4 10.7 6.8 4.5

Exchange rate (BRL/ USD,end of period) 2.66 3.96 3.85 4.02

Interest rate, SELIC (%, end of period) 11.75 14.25 14.25 11.50

Private consumption (% growth) 1.3 -4.0 -3.3 -0.1

Public consumption (% growth) 1.2 -1.2 -1.0 -1.6

Fixed capital investment (% growth) -4.5 -14.1 -12.6 1.6

Exports (% growth) -1.1 6.1 3.2 4.8

Imports (% growth) -1.0 -14.3 -14.2 0.7

Fiscal result (% GDP) -6.1 -10.2 -9.0 -7.3

Current account (% GDP) -4.3 -3.4 -2.1 -1.0


españ - bbva research · the results are significant at a 5% level for argentina, brazil,...

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