1. Economic Outlook
Macroeconomic Research – Itaú Unibanco
May 2014

2. Overview International
Activity is picking up while interest rates remain low.
Activity in the U.S. is rebounding after a weak start to the year, and the Fed continues to indicate low rates for an extended period.
Chinese economy is likely to stabilize following the mini-stimulus package.
The recovery in the euro zone is becoming more robust.
External environment remains supportive for emerging markets.
However, volatility can return with higher long-term interest rates in the U.S. and with the uncertainties related to China.
Brazil
We forecast 1.4% GDP growth in 2014.
We regard the current stronger level of the BRL as likely to be temporary.
We maintain our 6.5% IPCA forecast for this year.
We expect the Selic rate to remain unchanged, at 11%, until year-end. Additional adjustment in monetary policy is likely to bring Selic rate to 12.5% by the end of 2015.
Fiscal adjustment will be difficult this year.

3. Global Economy Is Recovering
2012
2013
2014
World
5.1
3.2
3.0
3.4
3.3
USA
2.9
2.8
1.9
2.5
2.3
Euro Zone
-0.6
-0.4
1.3
1.5
Japan
1.4
1.1
China
12.1
7.8
7.7
7.2
6.7
Source: Haver Analities, CEIC, Bloomberg, Itaú Unibanco

4. U.S. – Activity Rebounds After a Weak Start to the Year...
The U.S. GDP grew only 0.1% annualized in the first quarter.
We reduced our GDP forecast to 2.5%, from 2.8%, in 2014.
Nonetheless, economic indicators confirm a pick-up in activity.
GDP Real Growth
ISM
Higher than 50 indicates expansion
Source: Itaú Unibanco, Institute for Supply Management, Bureau of Economic Analysis

5. ... Without Pressuring Inflation
The current wage dynamics and low inflation support the Fed guidance of low rates for an extended period.
Nonetheless, the expectation of robust growth and a tighter labor market ahead could increase long-run interest rates.
Payroll and Average Hourly Earnings
Thousands, YoY change (%)
10-Year Treasury Yield (%)
Source: Itaú Unibanco, BLS, Bloomberg

6. China: Few Signs of Improvement in 2Q14
After the first-quarter slowdown, March data showed a small improvement.
Further moderate stimuli will also help economic activity in 2Q14.
We maintain our GDP forecast at 7.2% in 2014.
Retail Sales and Industrial Production
3 month average, %
Additional Stimuli Package
Measures
RRR cut for rural banks
Liberalization measures for infrastructure investment
Export and employment subsidies
Source: Itaú Unibanco, NBS, Haver Analytics

7. Europe: We Raised Our Growth Forecast to 1.3% From 1.1% in 2014
Retail sales have picked up in 1Q14, and Industrial production is maintaining a good pace.
Survey data suggest that the good growth momentum continues.
Industrial Production and Retail Sales
YoY Growth, %
GDP %
Source: Itaú Unibanco, Haver Analytics

8. Emerging Markets: External Environment Remains Supportive
With interest rates in the U.S. well-behaved and stabilizing growth in China, financial flows have returned to developing economies.
But volatility may return: weak fundamentals, higher international interest rates and uncertainties surrounding China are the major risks.
Exchange Rate Appreciation
Since January-02, 2014
Stock Exchange
*EM Stock: Geometrical average of Stock Exchange Index from Mexico, Chile, China, Indonesia, South Korea and Turkey.
Source: Itaú Unibanco, Bloomberg

9. Commodities: Our Projections for the Short Term
Itaú Commodities Index
Source: Itaú Unibanco

10. Latin America: Growth Remains Relatively Weak
Peru
Mexico
2013
2014
2015
GDP - %
5.6
5.3
5.9
1.1
2.7
3.8
PEN / USD (Dec)
2.80
2.85
2.90
MXN / USD (Dec)
13.1
13.2
Interest Rate- (Dec) - %
4.00
Interest Rate - (Dec) - %
3.50
4.50
CPI
2.9
3.0
2.5
4.0
3.7
3.2
Colombia
Chile
4.3
4.5
4.1
3.3
COP / USD (Dec)
1930
1950
1980
CLP / USD (Dec)
526
575
3.25
4.25
5.00
1.9
3.6
Argentina
3.1
-2.0
0.0
ARS / USD (Dec)
6.5 10 13
BADLAR - (YE) - %
21.6
35.0
30.0
CPI - % (Private Estimates)
28.4
37.0
27.0
Source: Itaú Unibanco

11. Brazil: What Do We Expect in the Short Term?
2012
2013
2014
2015
Economic Activity
GDP (%)
1.0
2.3
1.4
2.0
Unemployment (%) - December
5.4
5.1
5.6
Inflation
IPCA (%)
5.8
5.9
6.5
Monetary Policy
Selic Rate (%)
7.25
10.00
11.00
12.50
Fiscal
Primary Surplus (% GDP)
2.4
1.9
1.3
1.7
Balance of Payments
Exchange Rate (eop)
2.08
2.36
2.45
2.55
Current Account (% GDP)
-2.4
-3.6
-2.8

12. Brazil: Latest Data Point to Activity Cool-Off...
Our diffusion index for economic activity remains at low levels.
Confidence continues to slide.
Activity Diffusion Index*
Ratio of activity indexes that increased on MoM change, 3-Month Average
Confidence in the Industrial Sector
Seasonally adjusted
*A 47.1% Index is consistent with null GDP growth
Source: Itaú Unibanco, IBGE, FGV

13. ...Consistent With Our Expectation of Moderate Economic Growth
The methodologically revised industrial production series confirms stagnation of industry since
We forecast 1.4% GDP growth in 2014 and 2.0% next year.
Industrial Production
12-month accumulated growth
Real GDP
Seasonally adjusted
*Untill February
Source: Itaú Unibanco, IBGE

14. Rationing Risks Persist
The recent evolution of the electricity balance in Brazil confirms the risk of power-rationing and the system’s heavy reliance on thermal power plants, at least until 2015.
Despite the electricity auction and the loan from the electricity trade chamber known as CCEE, distribution companies are likely to need more cash support in 2014.
Aggregate Reservoir Levels
(% of total capacity)
Hydroelectric Power Generation
(% of long-term average)
Thermal Plant Usage (GW Average)
Source: Itaú Unibanco, ONS

15. Brazil Has Been Particularly Favored by Recent Capital Flows
NTN-B 2050 Rate (%)
Five-Year Fixed-Floating Swap Rate (%)
Brazilian Five-Year CDS
Ibovespa Index
Source: Bloomberg

16. BRL: Appreciation Is Likely Temporary but May Last Longer
The recent exchange-rate appreciation is related to a global strengthening movement in emerging-market currencies.
The government seems comfortable with the current level of the exchange rate. The central bank reduced the pace of rollovers of swap contracts, signaling flexibility.
However, domestic factors such as current account deficit and U.S. treasury-yield upward trend will cause the exchange rate to weaken again during the year.
Exchange Rate
Monthly average
Current Account Balance
12-month accumulated, USD in billions
Source: Itaú Unibanco, BCB

17. Inflation: We Maintain Our 6.5% IPCA Forecast for This Year
The IPCA climbed by 0.67% in April, after a 0.92% increase in March, below the median of market expectations (0.80%). Foodstuff prices surprised on the downside (1.2%, while our expectation was 1.55%). The year-over-year change in the IPCA reached 6.28%.
We maintain our 6.5% IPCA forecast for this year. The smaller change in food prices was offset by recent revisions to electricity tariffs (to 14%, from 10% previously) and lotto game prices.
Foodstuff Inflation
Estimates for Regulated Prices
Annual Change
2014
2015
Regulated
5.6%
7.2%
Gasoline
6.0%
8.0%
Electricity tariffs
14.0%
15.0%
Urban bus fares
2.0%
10.0%
Others
4.5%
5.0%
Source: Itaú Unibanco, IBGE

18. Our 2015 IPCA Forecast Remains at 6
Our 2015 IPCA Forecast Remains at 6.5% Reflecting a Different Breakdown
We have lowered our 2015 estimate for regulated price increases to 7.2% from 8.0%, as we expect some of the correction in electricity tariffs to be moved up to 2014.
The slowdown in expected inflation in market-set prices compared with our 2014 estimate (7.1%) is driven by our updated expectation of smaller increases in food and service prices.
IPCA Breakdown YoY Change (%)
Source: Itaú Unibanco, IBGE

19. Interest Rate: End of Cycle, If Allowed by Inflation
We estimate the Selic rate at 11.00% until the end of Additional adjustment in monetary policy will bring the Selic rate to 12.50% next year.
Selic
% p.a
Source: Itaú Unibanco, Bloomberg

20. Fiscal Policy: Waiting for an Adjustment
The pace of federal spending remained brisk in the first quarter.
With the primary surplus at 2.1% of GDP, the public sector posted the lowest result for a first quarter in the historical series.
Real Expenditure Annual Growth %
Public Sector Primary Surplus
% GDP
Source: Itaú Unibanco, BCB

21. Our Forecast for Fiscal Policy
Primary Surplus (% of GDP)
Nominal Deficit (% of GDP)
Gross Public Debt (% of GDP)
Gross Public Debt Minus International Reserves
(% of GDP)
Source: Itaú Unibanco, BCB

22. Conclusion
Global economic recovery benefits emerging markets, if international interest rates do not increase too much.
Brazilian GDP growth at around 1.4% for 2014.
Domestic and international scenarios are likely to put pressure on the BRL this year.
We regard the current stronger level of the BRL as likely to be temporary.
We maintained our estimate for 2014 and 2015 IPCA inflation at 6.5%.
We expect the Selic rate to remain at 11.00% this year and reach 12.50% in 2015.
Fiscal adjustment will be difficult this year.

23. Our Economic Analysis Online