BRAZIL – Q1 2009 GDP Likely on the Downside; COPOM to Keep Loosening as IPCA Slowly Trends Lower
This coming week’s most awaited data release is the GDP data for Q1 2009 which is widely expected to print a sharp decline. As we have already pointed out on our latest version of the RGE Global Outlook, we are expecting a severe deceleration on both private consumption and investments as suggested by the pattern of retail sales and the industry. At the same time, the collapse in both imports and exports add weight to the slowdown in the economy but to the national accounts point of view the fast deceleration of imports comes to our benefit at this moment.
We expect Q1 2009 GDP to print a negative growth of 2.3% y/y with a decline of 1.6% q/q. The results are better than the -3.6% q/q seen on Q4 2008 but the negative trend continues and the accumulated contraction from Q3 2008 through Q1 2009 could be nearly -5.0%. We are expecting private consumption to slow from 2.2% y/y in Q4 2008 to 0.9% while fixed investment is likely to have collapsed from 3.8% to -9.2%. We forecast government consumption to have declined from 5.5% to 2.6% a significant contraction mainly caused by lower tax collection and revenues. Exports are likely to continue to contract going from -7.0% in Q4 to -12.5% while imports should also have decelerated dramatically, going from 7.6% growth y/y in Q4 to -18.6% during the Q1 2009.
We maintain our full-year forecasts for 2009 GDP at -1.5% with consumption growing only 1.1% and investments contracting 11.6%. Domestic demand is expected to contract -2.0% while exports and imports are expected to decrease by 11.9% and 13.7% respectively.
Also under the radar of economist on the coming week is the BCB’s COPOM meeting, in which the interest rate will be decided. The BCB has already slashed rates by 350 bps this year with the last decision on April 9th being a 100 bps cut, following the 100 and 150 bps cuts in January and March respectively. The signs on the output side continue to show severe weakness despite some indications here and there of limited moderations. At the same time, the outlook for inflation remains quite positive but starts to become a bit controversial as international prices of commodities take a ride on a sharp rally.
As we have showed before (see Will Commodities Deflation Save the Brazilian Central Bank?), the IPCA inflation is quite sensitive to changes in commodity prices via non-administered prices or more specifically via wholesale prices. In this sense some pass-through could arise especially if the movements in commodities persist. On the positive side is the fact that the Brazilian real (BRL) is one of the best examples of ‘commodity currency’ available, and usually appreciate in tandem with upward movements on the commodities markets. Therefore, some ‘beneficial’ pass-through via currency is likely to counter balance the commodities effect but the final result to the IPCA inflation could be a less optimistic or at least more uncertain than initially thought. This is more true if we consider the relative stickiness of the IPCA index to the appreciation of the currency
For those reasons, we reaffirm our call for an additional 75bps cut on Wednesday June 10th. We leave the following decisions open as we also believe the BCB will probably express a data dependent rhetoric after this decision. We point out that the current state of the economy is such that the wide output gap will tend soften the transmission channels between both commodities and FX to inflation and between monetary policy actions and inflation readings. In this sense, the BCB gains in terms of smoothness and control over the policy actions taken, and would benefit by taking more measured cuts, which will possibly result in a longer and larger cutting cycle.
The most relevant piece of information to follow this week will be the May inflation. The sharp decline in domestic demand, stable-strong MXN and the lag effect from relatively low commodity prices (vs. their peak in 2008), together with seasonal factors, should have kept inflation on a downward trend. Moreover, during the week (June 11th), INEGI will report on gross fixed investment for March. We expect a slighter contraction of 5.7% y/y (6.7% y/y 3MMA) because a positive calendar effect eased downward pressures in construction and capital goods imports during the month of March. The Bloomberg consensus expects investment to have declined by 6% y/y.
On Tuesday June 9th, the central bank will report inflation for May. Headline CPI likely decreased by 0.27% m/m and core CPI went up by 0.27% m/m, bringing headline and core inflation to 6% y/y (6.17% y/y in April 2009) and 5.57% y/y (5.81% y/y in April 2009), respectively. Both inflation reading would be within the CB target range for the Q2 2009 (6% to 5.5%). On core inflation, weak domestic demand should have kept service prices limited while a stable/stronger currency will likely maintain tradable prices on check. Moreover, relatively low commodity prices (compared to their peak in 2008) bode well with the disinflationary trend. On headline CPI, seasonal factors related to administrative and concerted prices likely contained the upward pressure on fruits and vegetables. The Bloomberg consensus expects headline CPI to have declined by 0.26% m/m and core inflation to have increased by 0.27% m/m in May.
Argentina—Official Data Likely to Show That Inflation Continued Moving Down in May
On Wednesday, June 10th, INDEC will report inflation data for May. We expect headline CPI to register an increase of 0.51% m/m (0.33% m/m in April and 0.56% m/m in May 2008), therefore bringing the annual print to 5.68% y/y (5.73% in April). Overall, weak domestic demand likely contained upward pressures stemming from prices affected by a weaker exchange rate and seasonal factors (apparel, housing, health, and education). The Bloomberg consensus expects headline CPI to come in at 0.4% m/m.
Chile—Narrower Trade Surplus in May
On Monday, June 8th, the central bank will report on the trade balance for May and we expect a surplus of USD 670mn (USD 732bn in May 2008). Exports likely continued declining rapidly (-41% y/y to USD 3.42bn), on the back of relatively low copper prices and weak external demand. The latter should have hurt industrial and agricultural exports. Imports likely declined sharply as well (-45.7% y/y to USD 2.75bn), as the ongoing deceleration in domestic demand impacted consumer, intermediate and capital imports. If we are correct, this will mean that total trade (exports plus imports or 70% of GDP) continued declining sharply in May 2009 (-43% y/y vs. 39% y/y 3MMA), signaling that Chile’s economy remained under strong downside pressures. The Bloomberg consensus expects a trade surplus of USD 500mn.
On Friday, June 12th, the central bank will release the monetary policy minutes from the May 29th meeting. In that meeting, the central bank lowered the ON lending rate by 100bps to 5% and alluded that the end of the easing cycle is near. In the communiqué, the CB also me
ntioned that monetary policy is clearly expansionary and that any further easing will most likely be performed at a less aggressive pace. As mentioned in previous occasions, there is still room for the CB to continue easing rates as inflation and inflation expectations continue being adjusted on the downside and the domestic economy remains under downward pressure. We expect BanRep to bring the monetary policy rate to 4% or 4.5% in Q3 2009.