Itaú BBA - A new challenge for global growth

Global Scenario Review

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A new challenge for global growth

February 10, 2020

Coronavirus increases uncertainty for global economic activity. In Brazil, the Central bank interrupts the easing cycle.

Please open the attached pdf to read the full report and forecasts.


Global Economy
Coronavirus and U.S. Election
We revised our China’s GDP forecast to 5.8% (from 6.0%) with downside risks if the coronavirus contagion persists. In the U.S., the election uncertainty continues.

Copom signals interruption of the easing cycle
The Copom cut the Selic rate to 4.25% pa, and stated it would be warranted to interrupt the monetary policy easing cycle. We thus expect the authorities to leave the base rate unchanged at 4.25% until year-end, from 4.0% in the previous scenario. 

Race against the clock
The government expects to conclude the debt restructuring process by the end of March, a tight schedule in our view. In this context, the odds remain high of missing a payment before a deal with creditors is reached.

Stagnant economy means easing cycle will continue
We expect Banxico’s monetary policy rate to reach 6.00% by the end of 2020, with the first 25-bp rate cut of the year coming at the February meeting. Low headline inflation, a widening output gap and a stronger Mexican peso support gradual rate reductions.

Still too many unknowns
Activity ended 2019 with a better-than-expected acceleration, yet with abundant domestic uncertainty and global growth concerns. In this context, we are maintaining an unfavorable forecast of 1.2% growth for this year.

Lower political risk, for now
Recent legislative elections have produced a fragmented Congress. While the new Congress should have more friendly relations with President Vizcarra, passing meaningful reforms will be difficult.

Stable rates persist
Amidst a still negative output gap and a plethora of global and domestic risks, we expect the board to keep the policy rate stable at the mildly expansionary rate of 4.25% over most of our forecast horizon.


A new challenge for global growth

In a year that seemed to start with lower risks, the new coronavirus epidemic, centered in China, added a new source of uncertainty to global economic activity. The number of cases has accelerated significantly in recent weeks, and local authorities have taken drastic measures to try to contain the spread of the disease, such as restrictions on transportation to affected regions and extension of the Chinese New Year holiday. For the time being, most cases remain located in Hubei province, but there have been records of the virus in 23 other countries, from all regions.

In this context, we revised our China’s GDP forecast to 5.8% (from 6.0%) in 2020 with downside risks if the contagion persists. Commodity prices, such as oil and copper, were also revised downwards, in line with the expected slowdown for the Asian country. In the U.S., assuming the contagion of the disease will be limited, we kept our 2020 GDP growth forecast unchanged at 2.0%. Over there, the main risk remains the presidential elections, amid increasingly polarized economic policy proposals. There are six possible names for the Democratic candidate, whose primaries started in the past few weeks, but remain undefined. In Europe, economic growth is expected to continue to be weak and, given that and the still low inflation outlook, monetary policy is set to remain stimulative.

In Latin America, the coronavirus impacts pose a downside risk for the region's already weak economic activity. Taking into account weaker data at the margin, we reduced our growth forecasts for Mexico and Peru this year, also considering, in the latter case, the likely impacts of the new virus on copper prices. In Chile, we expect an anemic growth, as the effects of the protests should continue impacting the local scene. In Argentina, we maintained our expectation of a significant decline in GDP this year. In this context, there is still room for additional monetary easing in the region. We expect further cuts in interest rates in Mexico, Chile and Peru.

In Brazil, the Monetary Policy Committee (COPOM) delivered the widely expected 25-bp rate cut, taking the Selic rate to 4.25% pa, and stated, clearly, that it sees as warranted the interruption of the easing cycle. We thus revised our expectations and now see the authorities leaving the base rate unchanged at 4.25% pa until year-end. Regarding economic activity, we continue to expect a gradual acceleration of the economy, with GDP growth of 2.2% in 2020 and 3.0% in 2021. We also made no changes to our inflation and exchange rate forecasts.


Global Economy
Coronavirus and U.S. Election 

• The outbreak of the coronavirus, and the measures taken to contain it, will likely limit China’s growth to 5.8% (from 6.0%) in 2020, with risk of 5.0%-5.5% if the contagion persists. 

• U.S. Election uncertainty to continue.

• ECB review: hawkish discussions unlikely to lead to hawkish decisions.

• Commodities: lower oil and copper prices due to China shock.

• Latin America: activity remains bumpy amid domestic and external uncertainties.


Please open the attached pdf to read the full report and forecasts.

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