Talk of the Day
Despite the improvement from 1Q17, activity in 1H17 confirms the economy remains weak. Activity expanded 0.9% from one year ago, below the 1.0% growth estimated from the monthly GDP proxy (Imacec). Growth in 2Q17 was higher (at 1.3%) after correcting for the unfavorable calendar effect in the quarter, but is still sluggish. Domestic demand picked up from the previous quarter, aided by an improved performance of consumption. Meanwhile, investment and net exports continue to pull activity down.
Although we expect activity to continue recovering throughout the remainder of the year, we have lowered our 2017 GDP forecast to 1.3% (previous: 1.6%). Activity will be favored by firming growth in Chile’s trade partners, higher copper prices, the monetary stimulus applied by the BCCh and low inflation. However, uncertainties linked to the fate of reforms after the presidential elections will continue to weigh negatively on confidence and investment, curbing an activity improvement. ** Full story here.
The current account deficit widened in 2Q17, as mining export volumes remain weak. The deficit came in at USD 1.5 billion in the second quarter of the year, larger than our USD 1.2 billion deficit forecast, the market’s USD 1.3 billion estimate, and the USD 1.0 billion deficit recorded in 2Q16. A weaker trade balance of goods and services, as well as a larger income balance deficit, led the deterioration from 2Q16. The resulting rolling-4Q current account deficit rose to USD 5.6 billion (2.2% of GDP), from USD 3.6 billion in 2016 (1.4% of GDP). Our own seasonal adjustment shows the current account deficit moderated at the margin to 3.0% of GDP (from 3.4% in 1Q17). Foreign direct investment recorded an outflow of USD 0.3 billion, the worst quarterly direct investment on record, and down from the USD 2.7 billion investment in 2Q16.
We expect the current account deficit to retreat in the remainder of the year as internal demand stays weak, the effects of mining strike continue to fade, and copper prices remain high. Hence, we see the current account deficit around the 1.4% recorded in 2016. However, the most recent balance-of-payments data pose the risk of a higher deficit. ** Full story here.
Banrep general manager Juan José Echavarría’s presentation of the 2Q Inflation Report reinforced there is not much room to lower interest rates in Colombia, indicating once again that a pause will likely follow a 25-bp rate cut this month.Still, according to him, activity has been unsatisfactory and growth this year will likely be between 1.6-1.8% (previous: 1.8%). Echavarría noted that consumer spending remains very depressed, but highlighted that consumer confidence is becoming less pessimistic. A growth recovery to between 2.5% and 3.0% is expected for next year. Additionally, Echavarría sees Colombia’s potential growth at 3.3%.
We see the final cut of the year at this month’s meeting (to 5.25%). However, we expect additional rate cuts in 2018. We see the policy rate being lowered to 4.5% next year, which the central bank sees consistent with a neutral level. In fact, Echavarria said the neutral real rate is close to 1.4% (so around 4.5% in nominal terms, if steady-state inflation is assumed at the 3% target).
The week’s highlight will be August’s IPCA-15 consumer inflation preview (Wednesday). We forecast a 0.40% monthly increase, with year-over-year inflation slowing to 2.7% from 2.8%. On economic activity, FGV will release its industrial business confidence preview for August on Tuesday. We expect a 1.0% mom s.a. increase, taking the confidence back to a level near the one before political uncertainty shock. Onto the balance of payments report (Wednesday), we expect a USD 3.5 billion current account deficit in July, and project direct investment in the country (DIC) to register inflows of USD 5.5 billion in the month. July’s tax collection may also be released during the week, for which we forecast BRL 108.3 billion, or a 1.8% year-over-year decrease in real terms.
The market will keep monitoring the reforms being discussed in Congress.In that regard, the TLP (new Long Term Interest Rate) report can be voted tomorrow in the joint commission (Lower House and Senate), built to discuss this topic. ** Read our full week ahead note below.
The Week Ahead in LatAm
On Tuesday, the central bank will hold its biweekly monetary policy meeting, to decide on the reference rate. The president of the central bank, Federico Sturzenegger, ratified recently the contractive stance of the monetary policy. According to Sturzenegger, the persistence of the core inflation and the commitment to further disinflation will lead the monetary authority to maintain the monetary stance. We do not expect changes in the monetary policy rate until 4Q17, after the mid-term elections.
On Thursday, the INDEC will publish the EMAE (official monthly GDP proxy) for June. The EMAE rose 0.6% year over year in May on a sequential basis, bringing the quarter-over-quarter growth to 2.3% (annualized). We expect activity to grow 3.6% year over year in June (+0.6% mom/sa), bringing the year-over-year growth in 2Q17 to a 2.5%.
The IGA (GDP proxy published by OJF consulting firm) for July will see the light also on Thursday. The IGA has posted four sequential gains between March and June, growing 1.9% year over year in 1H17.
The trade balance for July will also come out on Thursday. The trade balance registered a USD 0.7 billion deficit in June, bringing the 12-month trade balance to a deficit of USD 1.2 billion (down from a surplus of USD 1.4 billion in 1Q17 and USD 2.1 billion in 2016). We expect a trade deficit of USD 50 million in July.
Universidad Di Tella will publish its consumer confidence report for August on Thursday, as well. The index rose by 1.2% month over month in July, after dropping 8.2% in June. The index is now 6.8% below the figure reported one year before.
August’s IPCA-15 consumer inflation preview will be released on Wednesday. We forecast a 0.40% monthly increase, with year-over-year inflation slowing to 2.7% from 2.8%. With this result, inflation will have reached 1.8% from January to August, well below the 5.7% recorded during the same time window last year. The transportation and housing groups will make up most of the rise in the month, while foods and clothing will contribute negatively. In short, inflation will continue on a favorable downward trend, driven mainly by ample slack in the economy and the favorable food price shock.
The market will keep looking into the reforms being discussed in Congress. In that regard, the TLP (new Long Term Interest Rate) report can be voted by Tuesday in the joint commission (Lower House and Senate), built to discuss this topic. July’s tax collection may also be released next week, for which we forecast BRL 108.3 billion, or a 1.8% year-over-year decrease in real terms.
On the economic activity front, FGV will release its industrial business confidence preview for August on Tuesday. We expect a 1.0% mom s.a. increase, taking the confidence back to a level near the one before political uncertainty shock. Retail and consumer monthly surveys for August, also from FGV, will be released on Friday.
Onto the balance of payments report (Wed.), we expect a USD 3.5 billion current account deficit in July, topping last year’s deficit of USD 4.0 billion for the same month. After four consecutives surpluses, we may have a deficit in the current account driven by the deficit in income account that will likely be higher, driven by profits, dividends and seasonally higher interest payments. Over twelve months, the current account deficit should sum to USD 13.9 billion (0.7% of GDP). We expect direct investment in the country (DIC) to register inflows of USD 5.5 billion in July – if confirmed, DIC will amount to USD 86 billion over 12 months.
On Thursday, think-tank Fedesarrollo will release the July Industrial and Retail confidence. In June, industrial confidence stopped deteriorating but remained depressed at -5.4% (0 = neutral), below the +3.7% recorded one year earlier. Meanwhile, retail confidence stayed in optimistic territory, but it continues to decline (down to 14.9% from 22.9% one year ago and 15.3% in May). We expect confidence levels to remain low in the months ahead as an activity recovery is not imminent.
Starting the week, the statistics institute (INEGI) will publish Q2’s GDP growth, which we expect to post 1.7% year-over-year (down from 2.8% in 1Q17), slightly below the flash estimate. Industrial production fell 1.1% year-over-year in 2Q17 (revised down from -1% in the flash estimate), after recording a virtually nil growth rate in the previous quarter. The service sectors – which expanded 3.7% year-over-year in 1Q17 – remained robust in 2Q17 (growing 3.2%, according to the flash estimate), although coincident indicators (such as retail sales and the monthly proxy for private consumption) show a sequential deceleration.
Along with the quarterly GDP data, INEGI will also publish June’s monthly GDP proxy (IGAE), which we forecast at 2.7% year-over-year (after growing 3.1% in May). We already know that industrial production fell 0.3% year-over-year in June (down from a 1% expansion in May). Service sectors likely slowed down somewhat, from strong growth in May (4.4% year-over-year), amid falling real wages, slower consumer credit, and less impulse from remittances converted into pesos. Nevertheless, we highlight that consumption (and service sectors) remain supported by robust formal employment.
INEGI will announce June’s retail sales on Wednesday. We estimate that retail sales slowed down to 2.5% year-over-year, after growing 4.1% year-over-year in May. In June, real wages fell at a sharper pace, consumer credit slowed down, and the impulse from remittances converted into pesos diminished. Formal employment growth, nevertheless, remained robust.
On Thursday, INEGI will publish CPI inflation figures for the first half of August. We expect bi-weekly inflation to post 0.25%, driven by the seasonality of education prices (materials, tuition, etc.) given the beginning of the school year (after the summer). Conversely, we expect lower prices for non-food core goods (tradables) and gasoline to exert downward pressure. Assuming our forecast is correct, headline inflation would decrease to 6.53 % year-over-year (from 6.59% in the second half of July).
On the same day, the Central Bank (Banxico) will publish the minutes of the latest monetary policy meeting, held two weeks before. We expect the content of the minutes to reinforce the message provided in the statement; that is, the current level of the policy rate is consistent with the convergence of inflation to the target. In other words, this means that Banxico’s board baseline scenario is not to hike anymore, unless inflation deviates significantly from their forecasts. Moreover, we believe the minutes will also shed light on the contrasting views between board members, who have significantly different outlooks for inflation and the room of Banxico to decouple from the Fed. Nevertheless, we highlight that, according to recent guidance, none of the board members has appetite for rate cuts in the short-term.
Finally, INEGI will announce July’s unemployment rate on Friday. We expect the unemployment rate to post 3.4% (below the 4% rate recorded in the same month of last year) given that labor market conditions remain tight. According to data reported by the Mexican Institute of Social Security (IMSS), formal employment remained growing above 4% year-over-year in July.
Shortly after, the Central Bank will publish Q2’s current account balance. We expect the current account deficit to come in at USD 3,800 million in 2Q17, with the 4-quarter rolling deficit narrowing to USD 19.6 billion (1.9% of GDP, according to our calculations) from USD 22 billion (2.1% of GDP) in 1Q17. This improvement is being driven by the trade balance (more specifically, by stronger manufacturing exports).
The Central Bank will publish Q2’s GDP growth on Friday, including the demand-side breakdown. Considering that the monthly GDP proxy expanded 3.6% year-over-year in June, we estimate that GDP grew 2.4% year-over-year in 2Q17 (u from 2.1% in 1Q17, when the economy was hit both by El Niño and the corruption scandal that paralyzed large infrastructure projects). In 2Q17, we believe that net exports (mainly metallic mining and fishing goods) remained the driver of growth. We also believe that the fall of private investment moderated (given the incipient improvement of construction activity and imports of capital goods); public sector demand was firmer (with evidence of stronger public investment, particularly in June); and consumption continued growing at a weak pace (amid soft labor market conditions and negative wealth effects from El Niño).