Situación España 1T16 2 nd QUARTER Situación 2016 • Españ Economic Outlook Brazil
Brazil Economic Outlook / 2 nd Quarter 2016 Main messages Economic activity will continue to weaken while the political environment should remain turbulent 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 Page 2
Brazil Economic Outlook / 2 nd Quarter 2016 Global Global environment: fragile and China-dependent growth Page 3
Brazil Economic Outlook / 2 nd Quarter 2016 Global environment: fragile and China- dependent growth World GDP (QoQ%). Forecasts for 1Q16 and 2Q16 World GDP accelerated somewhat and based on BBVA-GAIN financial tensions eased in the last few 1,6 months… 1,4 1,2 …as concerns about China and US average 2000-07 monetary policy lessened. 1,0 0,8 average 2010-15 0,6 World growth is expected to continue to accelerate gradually, but to remain fragile 0,4 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 and dependent mainly on the evolution of China Source: BBVA Research Page 4
Brazil Economic Outlook / 2 nd Quarter 2016 Brazil Economic activity will contract sharply in 2016 and recover timidly in 2017 Page 5
Brazil Economic Outlook / 2 nd Quarter 2016 The political environment is expected to remain turbulent Michel Temer’s approval rating (%) Following recent decision by the Congress, President Rousseff stepped aside and Vice- 100 President Michel Temer assumed presidential 90 duties. 80 70 Once the doubts about who will govern the 60 country have been mostly cleared up, we see 50 some room for domestic uncertainty to fall. 40 30 20 However, we expect political tensions to remain 10 high for many reasons: i) it is not clear whether 0 the new administration will have the needed February 2016 April 2016 support to govern, ii) ongoing corruption Disapprove him Approve him Does not know him scandals, iii) economic crisis, iv) fierce opposition, etc. Source: Ipsos Page 6
Brazil Economic Outlook / 2 nd Quarter 2016 Economic recovery is likely to be slow, as political turbulence and fiscal concerns will continue Confidence indices GDP growth (QoQ%) 90 2 80 1 70 0 60 50 -1 40 -2 30 Mar-99 Jan-00 Nov-00 Sep-01 Jul-02 May-03 Mar-04 Jan-05 Nov-05 Sep-06 Jul-07 May-08 Mar-09 Jan-10 Nov-10 Sep-11 Jul-12 May-13 Mar-14 Jan-15 Nov-15 -3 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 Business confidence index Consumer confidence index Confidence levels could increase, but are expected to remain at GDP to contract in 1H16 (not as much as in 2H15), stabilize in low levels 2H16 and be back into positive territory in 2017 Source: CNI, Fecomercio and BBVA Research Source: BBVA Research Page 7
Brazil Economic Outlook / 2 nd Quarter 2016 GDP is expected to decrease 3.0% in 2016 and grow by 0.9% in 2017 Brazil’s GDP, terms of trade and world’s GDP GDP growth: contributions of domestic and (% growth) foreign demand 10 20 10 8 8 15 6 6 10 4 4 5 2 2 0 0 0 -2 -5 -2 -4 -10 -4 -6 -6 -15 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015(f) 2016(f) 2017(f) -8 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 GDP World GDP Terms of trade (right) Domestic demand Foreign demand GDP Global environment is likely to be more supportive in 2017 Moreover, the economy will benefit from a mild decline in domestic uncertainty, a slowdown in inflation, a less contractive monetary policy, etc Source: IMF and BBVA Research Source: IBGE and BBVA Research Page 8
Brazil Economic Outlook / 2 nd Quarter 2016 Low growth scenario is reinforced by estimates showing that potential GDP has fallen to just 1.0% 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 10 4,0 3,4 3,5 8 3,0 2,5 2,2 2,0 6 2,0 1,1 4 1,5 1,0 2 0,5 0,0 0 -0,5 -2 -1,0 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020 2023 2006-2010 2011-2015 2016-2020 2016-2020 (current) (current) (previous) (current) Capital Labor TFP Pot. GDP Capital Labor TFP Pot. GDP Due to lower contributions from capital, labor and productivity, Reforms (tax system, labor system, social security, trade potential GDP has fallen significantly. liberalization, political system, etc) could trigger a faster than expected recovery of potential GDP Source: BBVA Research Source: BBVA Research Page 9
Brazil Economic Outlook / 2 nd Quarter 2016 Domestic demand deceleration is finally affecting inflation more significantly Inflation: headline, food, regulated and service Headline inflation: observed and forecasts (YoY %) (YoY %, end of quarter) 18 12 10,7 9,5 10 9,4 8,9 15 8,4 8,1 8,0 8 6,8 5,7 5,4 12 6 5,0 4,5 4 target range 9 2 0 6 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 Food Regulated Service Headline The main drivers of the slowdown are (and will continue to be) Recent inflation moderation reinforces our forecasts that inflation the smaller adjustments in regulated prices and the contraction will fall to 6.8% in 2016 and 4.5% in 2017. of domestic demand. Source: BCB and BBVA Research Source: BCB and BBVA Research Page 10
Brazil Economic Outlook / 2 nd Quarter 2016 Relatively high inertia in Brazil is one of the obstacles for inflation to slow down more significantly Persistence of headline inflation: based on the Persistence of core inflation: based on the estimation of a Phillips curve (Jan/04-Mar/16)* estimation of a Phillips curve (Jan/04-Mar/16)* 1,0 1,0 0,8 0,8 0,6 0,6 0,4 0,4 0,2 0,2 0,0 0,0 ARG BRA CHI COL MEX PER URU ARG BRA CHI COL MEX PER URU …reinforcing our view that inflation will only converge to the Different inertia measures show that inertia in Brazil is relatively high… targets next year. * Due to data issues, the sample for Argentina starts in August 2006. The results * Due to data issues, the samples for Argentina and Uruguay start in April 2008 and are significant at a 5% level for Argentina, Brazil, Colombia, Peru and Mexico and January 2011, respectively. The results are significant at a 5% level for Argentina, at 10% for Chile. Brazil, Colombia and Mexico and at a 10% level for Peru and Uruguay. Page 11 Source: BBVA Research Source: BBVA Research
Brazil Economic Outlook / 2 nd Quarter 2016 Inflation slowdown brings some relief, but the time for a monetary easing has not arrived yet Inflation expectations: market consensus for next Selic interest rate (%) 12 months, end of 2016 and end of 2017 (YoY %) 8,0 15 7,5 14 13 7,0 12 6,5 11 6,0 10 5,5 9 5,0 8 4,5 7 4,0 6 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Mar-13 Jun-13 Mar-14 Jun-14 Mar-15 Jun-15 Mar-16 Jun-16 Mar-17 Jun-17 Sep-13 Dec-13 Sep-14 Dec-14 Sep-15 Dec-15 Sep-16 Dec-16 Sep-17 Dec-17 2016 2017 Next 12 months Inflation expectations have fallen lately, but a further decline is Although the possibility of a new BCB governor being appointed needed for the BCB to start to cut the Selic rate soon increases uncertainty, we expect monetary easing to begin only next year Source: BCB and BBVA Research Source: BCB and BBVA Research Page 12
Brazil Economic Outlook / 2 nd Quarter 2016 We remain skeptical about a short-term solution to the fiscal crisis Fiscal indicators: primary balance, interest Although the new administration seems willing payment and gross public debt (% of GDP) to address fiscal matters, we are skeptical about its ability to approve a significant social 80 7,0 security reform and to effectively reduce the degree of rigidity of public expenses 75 3,5 70 0,0 Therefore, we expect public accounts to continue to worse and fiscal risks (debt crisis, 65 -3,5 fiscal dominance, etc) to remain in place 60 -7,0 The gross public debt is forecast to jump from 55 -10,5 66% of GDP in 2015 to 72% in 2016 and 75% in 2017. 50 -14,0 2008 2009 2010 2011 2012 2013 2014 2015 2016(f) 2017(f) Primary result (right) Interest payment (right) Public debt (left) Source: BCB and BBVA Research Page 13
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