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The 2017 revision was triggered by uncertainties on extraordinary revenues and the feasibility of a large budget cut.

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The central government deficit target was revised upward by BRL 20 billion to a deficit of BRL 159 billion (or -2.4% of GDP) for 2017, and by BRL 30 billion also to a deficit of BRL 159 billion (or -2.2% of GDP) for 2018. The 2017 revision was triggered by uncertainties on extraordinary revenues and the feasibility of a large budget cut. The 2018 revision, by its turn, reflected slower growth and inflation,  a limited scope for tax hikes or measures that rely on Congress approval, cautiousness on extraordinary revenues forecasts and unwillingness of keeping discretionary spending at very low levels. The government proposed BRL 14.5 bln in measures to increase its revenues and help to comply with the new target and BRL 6 bln measures in personnel spending that will allow discretionary spending to regain some of the margin lost after this year’s large cuts, even with a lower spending limit coming from falling inflation. With expenditures set on purpose at the ceiling, any positive surprise in the extraordinary revenues agenda or in the GDP growth will turn automatically into a better primary result in 2018.

Agency Standard and Poor’s affirmed Brazil’s BB sovereign rating and removed it from CreditWatch, but kept the negative outlook.

Strong retail sales in June. Core retail sales advanced 1.2% mom/sa in June, above the median of market estimates and our forecast (both at 0.4%). Compared to June 2016, core sales expanded 3.0%, marking a third consecutive gain after 24 months in negative territory. Meanwhile, broad retail sales (including vehicles and construction material) soared 2.5% during the month, also beating the median of market estimates (1.8%) and our call (1.3%). The strong result was widespread, with gains at the margin in eight out of ten components. Eight out of ten broad retail components advanced during the month. The exceptions were supermarkets (-0.4%) and office material and equipment (-2.6%).

Going forward, we expect retail sales will continue to show an upward trend in the coming months. However, coincident indicators are consistent with a preliminary forecast of a 0.4% slide in core retail sales in July. Coincident indicators out so far (retail activity indexes, vehicle sales, surveys with consumers and retail entrepreneurs) suggest that core retail sales will fall 0.4% mom/sa in July. ** Full story here.

Itaú Unibanco monthly GDP advances in June. Our monthly GDP proxy went up 0.6% mom/sa in June. Compared to one year earlier, monthly GDP advanced 1.9%. However, in 2Q17, the indicator receded 0.2% on a seasonally-adjusted basis vs. 1Q17, in line with our call for GDP in the second quarter. The decline was driven by a contraction in agriculture GDP (following a strong result in the earlier months of the year) and unfavorable statistical carryover from several GDP components due to weak readings in March. These two factors offset the improvement in underlying growth during the quarter. The monthly advance was widespread among PIBIU components, with eight out of ten posting increases. Retail stood out positively with a gain of 2.5% mom/sa, while the agriculture indicator dropped 1.7% mom/sa. Overall, preliminary data for July suggest another monthly increase in PIBIU. ** Full story here.

The Service Sector Survey (PMS) for the month of June will be released today at 9:00 AM (SP time), for which we expect the headline to fall 3.5% year-over-year.


Activity improved in 2Q17, but remains weak. Growth came in at 1.3%, between our 1.4% forecast and the 1.2% market consensus in Bloomberg, after an upwardly revised 1.2% year-over-year expansion in 1Q17 (2.0% in 2016). Activity in the quarter was led by social services (+3.0% year-over-year) and financial services (+3.9%), while manufacturing (-3.3% vs. +0.3% in 1Q17) and mining (-6.0% vs. -9.3% in 1Q17) dragged activity down. Natural resource related activity continues to disappoint, as it contracted 1.0% from last year (-1.3% in 1Q17), but fell even more (-6.0%) if agricultural production (+4.4%) is excluded. Meanwhile, activity in non-natural resource sectors expanded 1.4% year over year (1.5% in 1Q17), same as when oil refining is excluded. At the margin, activity expanded 3.0% qoq/saar, after a 1.3% contraction in 1Q17, favored by improving mining, construction and commerce.

We expect growth of 1.6% this year, as activity shows further improvement in 2H16. Lower inflation, the ongoing monetary-easing cycle, and higher average oil prices compared to 2016 will favor growth going forward.


Peru’s GDP proxy accelerated in June, although the recovery still seems fragile and uneven across sectors.The GDP proxy rose by 3.6% year-over-year in June, above our forecast (3.2%) and median market expectations (3.5%, as per Bloomberg), which implies a growth rate of 2.4% in 2Q17 (up from 2.1% in 1Q17). At the margin, according to data reported by the statistics institute, seasonally-adjusted GDP gained 0.9% from the previous month, with a significant pick-up in quarter-over-quarter annualized growth (3.7% qoq/saar in 2Q17, up from 1.6% in 1Q17). Natural-resource sectors performed strongly across-the-board, whereas growth of non-natural resource sectors remains modest.

We expect Peru’s GDP to slow down to 2.9% (from 3.9% in 2016), affected by temporary shocks, and then pick-up to 4.2% in 2018. El Niño has left negative aftereffects (by reducing the wealth of households), and the paralysis of large infrastructure projects will likely continue to be a drag in the short-term. Nevertheless, we see significant tailwinds for the coming quarters; namely, higher terms of trade (up by 8% year-over-year in 1H17, driven my metal prices, after five years of decline), more expansionary macroeconomic policies (mainly fiscal, but also monetary), the rebound of infrastructure investment (paralyzed projects re-entering the investment phase in 2018), and positive effects of market-friendly reforms on business confidence.

On another note, labor market data improved in July, showing higher growth rates for employment and wages.The unemployment rate posted 7% in July, exceeding our forecast and median market expectations (both 7%), standing at the same level as in July 2016. We note that in 2Q17 the unemployment rate dipped below last year’s levels because of a substantial drop in the participation rate (likely on the back of El Niño-led disruptions), but this drop has fully reverted by July. On the positive side, employment growth picked up to 2.1% year-over-year in July (highest growth rate in over a year), with positive growth in the number of wage-employed workers (proxy for formal employment) by 1.1% year-over-year (from an average of -0.2% in the past three months). The growth of nominal wages (monthly average income form employment) also picked up (to 2 .4%, from below 1% in the past three months), although real wages continued falling in year-over-year terms.

Fuente: ITAU

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