1. Economic Outlook
Macro Research – Itaú Unibanco
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.: Payroll Surprises 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, % 5
Source: Itaú Unibanco, CEIC

6. Emerging Economies Decelerate
GDP Growth – Emerging Economies
QoQ, SAAR
Mar Sep Mar Sep Mar Sep Mar Sep Mar Sep Mar-12 Sep Mar-13
3.3%
1.7%
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: Our Expectations for the Next Years
2012
2013
2014
World
5.1
3.2
2.8
3.4
3.5
USA
2.2
1.9
2.5
2.3
Eurozone
-0.5
-0.7
0.7
1.4
Japan
1.5
1.3
1.0
China
12.1
7.8
7.5
7.2
6.8
Source: Haver, CEIC, Bloomberg, Itaú Unibanco

8. Commodities: Our Expectations for the Short Term
Itaú Unibanco Commodities Index
Source: Itaú Unibanco

9. Latin America: Growth Divergence
Peru
Mexico
2013
2014
GDP - %
6.0
5.8
2.5
3.6
PEN / USD (YE)
2.70
MXN / USD (YE)
12.2
12.0
Interest Rate - (YE) - %
4.25
4.00
CPI - %
2.7
3.5
Colombia
Chile
3.8
4.7
4.5
COP / USD (YE)
1900
1850
CLP / USD (YE)
510
525
3.25
4.50
2.8
3.0
2.2
Argentina
2.0
0.0
ARS / USD (YE)
5.9
7.7
BADLAR - (YE) - %
21.0
25.0
CPI - % (Private estimates)
30.0
35.0
Source: Itaú Unibanco

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

11. Brazil: Our Expectations for the Short Term
2012
2013
2014
Economic Activity
GDP %
0.9
2.2
2.3
Inflation
IPCA %
5.8
6.1
5.9
Monetary Policy
Selic Rate %
7.25
9.75
Fiscal
Primary Surplus
2.4
1.7
1.1
Balance of Payments
Exchange Rate (eop)
2.08
2.18
Current Account (% GDP)
-2.4
-3.3
-2.9
Source: Itaú Unibanco and BCB

12. What Explains the Weak GDP in the Last Few Years?
GDP Growth Breakdown
QoQ, SAAR
Deleveraging:
Higher real interest rates (+150 bps)
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: Itaú Unibanco and IBGE

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

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

17. Will the Labor Market Remain Tight?
Unemployment Rate
%, sa
Average Real Wages
sa (2003=100)
Year average
2011
6.6
2012
5.5
2013
5.4
Annual change
2011
2.7%
2012
4.2%
2013
1.2%
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: Itaú Unibanco, 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: Itaú Unibanco , IBGE

21. Impact of Further Depreciation on Inflation
Exchange Rate Pass-Through – 10% Devaluation of the Brazilian Real
Number of Quarters After Devaluation
Exchange Rate
2.18
2.38
2.58
IPCA 2013
6.1%
6.5%
7.0%
IPCA 2014
5.9%
6.3%
Source: Itaú Unibanco

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

23. …and Less Expansionary Fiscal Stance
Primary Surplus - % 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 ( )
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 Economic Forum, 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 and U.S. Bureau of Labor Statistics

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

29. Challenges - Domestic Savings Must Increase to Enable Investments to Grow
Investment Rate
Source: IMF and Itaú 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