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July, 2013

Economic Outlook Macro Research – Itaú Unibanco. July, 2013. Agenda. International. Global economy at a new stage. Better growth perspectives in the U.S., emerging economies decelerate.

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July, 2013

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  1. Economic Outlook Macro Research – ItaúUnibanco July, 2013

  2. Agenda International • Global economy at a new stage. Better growth perspectives in the U.S., emerging economies decelerate. • The expectation of the Fed´s policy normalization has caused a sell-off in the emerging markets. The impact depends on each country´s fundamentals. Brazil • Markets’ adjustment to the Fed and popular demonstrations have produced a relevant chance in the macroeconomic scenario. • The Real has depreciated along with other currencies, but it has lost more value against the dollar than its more than its pairs. • Weaker Real leads to worse inflation perspectives in 2013 and stronger need to raise interest rates. • Fiscal stance is likely to become less expansionary, but popular demonstrations have reduced the probability of a deeper public spending adjustment. • More uncertain environment and higher interest rate affect negatively the growth perspectives.

  3. U.S.: PayrollSurprises Again in June • Labor market in the U.S. remains strong. • The payroll has gained 195k in June (BBG survey: 165k) and was revised at 70k in the two previous months. The unemployment rate remained stable, at 7.6%. Payroll – seasonally adjusted, thousands Unemployment Rate – % Source: Itaú Unibanco, BLS

  4. The Fed Signals Stumili Reduction: Sell-Off in the Emerging Markets • We believe the Fed will reduce it´s asset purchases pace in the September meeting. 5-year Nominal Rates bps change, May-to-Date Exchange Rates % change, May-to-Date Source: Itaú Unibanco, Bloomberg

  5. China: Focus on Reforms, Lower Growth • Recent policy signaling reflects less concern about short term growth and more focus on structural reforms that can lead to long run sustainable growth . GDP – Growth YoY, % Source: Itaú Unibanco, CEIC

  6. Emerging Economies Decelerate GDP Growth – Emerging Economies QoQ, SAAR 3.3% 1.7% Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Countries: Brazil, Mexico, Chile, Colombia, South Korea, Singapore, Taiwan, Indonesia, Malaysia, Thailand, Russia, Ukraine, Poland, Hungary, Czech Republic, Turkey, South Africa Source: Itaú Unibanco, Haver Analytics, FMI

  7. World: OurExpectations for theNext Years Source: Haver, CEIC, Bloomberg, ItaúUnibanco

  8. Commodities: Our Expectations for the Short Term ItaúUnibancoCommodities Index Source: ItaúUnibanco

  9. Latin America: Growth Divergence Source: Itaú Unibanco

  10. Growth in Brazil Disappointed GDP Forecasts for 2013 (%) GDP Forecasts for 2012 (%) Source: Latin Focus Consensus Forecasts

  11. Brazil: Our Expectations for the Short Term Source: Itaú Unibanco andBCB

  12. What Explains the Weak GDP in the Last Few Years? GDP Growth Breakdown QoQ, SAAR • Deleveraging: • Higher real interest rates (+150bps) • Macroprudential measures (reserve + capital requirements) • Reduction in government current expenditure growth (to 0% from 10%-15%) • Reduced BNDES disbursements • Global risk aversion (VIX up to 40) • High inventories, decelerating growth and imports • Supply Issues: • Fiscal expansion and interest rate cuts; economy reacts slowly • Excessive interventionism creates higher economic policy risk • Productivity deceleration seems stronger than cyclical factors; lower potential growth • With low productivity growth, rising wages reduce margins and become a limitation on investment • Inflation accelerates, affecting real income and consumption • Signs of growing net imports Source: Itaú Unibanco, IBGE

  13. Gradual Recovery Reflects Lower Potential GDP GDP (% Change, QoQ/sa) GDP – Annual Growth Source: Itaú Unibanco, BCB

  14. Volatile Industrial Production Data, Investment Shows Signs of Weakness Again • The industrial production has dropped in May, after a sharp rise in the previous month. The fall was widespread and has reached most subsectors. • The capital goods production had an important fallback. High interest rates, weaker Real and higher uncertainty are likely to cause a longer cool down in investment. Industrial Production – seasonally ajusted Investment – seasonally ajusted Source: ItaúUnibanco and IBGE

  15. Confidence Remains Weak Consumer Confidence Index (FGV) Industry Confidence Index (FGV) Source: Itaú Unibanco , FGV

  16. Growth Diffusion Points to Weak Activity Ahead Broad Data Set - Diffusion GDP vs. Diffusion Index Source: Itaú Unibanco

  17. Will the Labor Market Remain Tight? Unemployment Rate %, sa Average Real Wages sa (2003=100) Source: IBGE, Itaú Unibanco

  18. Risk: Jobs Creation Slowing Down • Formal jobs creation (Caged) was well below expectations in May. • Gradual activity recovery is likely to increase the hiring pace, but the persistence of weak data in the next months may lead to a less favorable labor market perspective New Jobs (CAGED) seasonally adjusted, thousands Occupied Population annual change Source: ItaúUnibanco, Ministry of Labor

  19. More Depreciated Exchange Rate, but there Is Overshooting Exchange Rate – Reais per Dollar Source: Itaú Unibanco, BCB, Bloomberg

  20. Exchange Rate Causes Higher Inflation IPCA – Consumer Price Index Source: ItaúUnibanco , IBGE

  21. Impact of Further Depreciation on Inflation Exchange Rate Pass-Through – 10% Devaluation of the Brazilian Real Number of Quarters After Devaluation Source: Itaú Unibanco

  22. Stronger Need to Raise Interest Rates… Real Interest Rates – Long-Term Bonds (NTN-B 50) Yield-Curve Pricing of Selic Rate Source: ItaúUnibanco, Bloomberg

  23. …and Less Expansionary Fiscal Stance PrimarySurplus- % GDP Net Debt- % GDP Source: Itaú Unibanco, BCB

  24. Challenges – Relatively High Labor Costs Manufacturing Sector – Hourly Compensation Costs in 2011 (USD) Change in Unit Labor Costs in USD Terms (2005-10) Source: U.S. Bureau of Labor Statistics

  25. Challenges – Heavy Tax Burden Tax Burden – % of GDP Source: Heritage Foundation, International Energy Agency (2011); Design: Itaú Unibanco

  26. Challenges: Infrastructure, Productivity Infrastructure Ranking (World Economic Forum) Ease of Doing Business 2012 Ranking (World Bank) Source: World EconomicForum, World Bank

  27. Challenges - Less Labor, Need More Investment • Labor contribution decreases. Growth depends on increasing investments and productivity. GDP Growth Decreasing Labor Contribution Source: IBGE, Itaú Unibanco andU.S. Bureau of Labor Statistics

  28. 20% Italy 18% 16% Poland 14% Brazil 12% Spending on social security (% GDP) 10% Japan 8% USA 6% Mexico 4% Colombia 2% 0% 15% 5% 10% 20% 25% 30% Population aged 65+ (% total) Challenges – Lack of Domestic Savings Public Spending on Social Security Source: IBGE and ItaúUnibanco

  29. Challenges - Domestic Savings Must Increase to Enable Investments to Grow Domestic Savings (%, 2011) Investment Rate Source: IMF andItaú Unibanco

  30. Conclusion World: news from the American economy have increased markets volatility in the short term, but the U.S. recovery is positive for the medium term. ü Higher interest rates in the U.S. are here to stay, but some correction in the asset prices is likely to happen after the sell-off in the emerging markets is finished. ü Brazil: weaker Real leads to higher inflation, higher interest rates and less expansionary fiscal stance. ü More uncertain environment (internal and external) is likely to reduce growth. The labor market is a risk. ü

  31. Long-Term Scenario Source: Itaú Unibanco

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