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Global Scenario Review

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August 9, 2019

The new round of U.S.-China tariffs will put more pressure on global growth, pushing further central banks around the globe into easing stances.

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


Global Economy
New tariffs reignite growth concerns
The new round of U.S.-China tariffs will put more pressure on global growth. Monetary policies are being loosened wherever possible, and rate cuts are about to become the norm in Latin America.

BCB starts the easing cycle
The central bank cut interest rates by 0.50 p.p. in July and, in our view, signaled a similar cut for September. We believe the Selic rate will reach 5.0% p.a. before the end of 2019.

Waiting for the vote
The latest polls reveal a very tight race for the primary election – asset prices may react to the result, as it will be a good indicator of the final electoral outcome (and its potential implications for economic policy).

A rate cut soon, but not in August
We expect the benchmark rate to start falling in September 2019, reaching a rate of 7.5% by the end of this year with three consecutive 25-bp cuts. 

Another 50-bp cut in September?
Increasing risks to growth and to inflation led the central bank to signal that more easing ahead is likely. We expect a 25-bp rate cut in September, but we don’t rule out a 50-bp move.

New wave of political uncertainty
President Vizcarra proposed bringing the general elections forward, given the political deadlock. The move will likely increase uncertainty and affect investment decisions.

Resisting rate cuts, for now
Despite the central bank’s assurance that rate cuts are not on the table, we still expect monetary easing to start by the end of this year, given the controlled core inflation and an underwhelming activity recovery.



Back to conflict mode

U.S.-China tensions re-escalated after a short-lived truce, sending shock waves through financial markets. The new round of tariffs announced by the U.S. sets both countries in the course of a deeper deceleration – bringing back global growth concerns. With a weaker and riskier trend for economic activity, interest rates are bound to go lower, not only in the US but also in most countries across the globe, as central banks continue to loosen their stances in Fed’s wake.

This is specially true in Latin America, where interest rate cuts are becoming widespread. The trade war adds headwinds to the already-weak economic activity in the region, while falling rates in developed economies open room for central banks to provide or add stimulus. Naturally, countries that have relatively low inflation (as Brazil, Chile and Peru) have greater room for easing, but we expect loosening ahead also in Mexico – where inflation still sits at uncomfortable levels – and in Colombia, where we see frustrations with growth coming ahead.

In Brazil, our scenario remains virtually unchanged. The pension reform moved in line with expectations and got its final approval by the Lower House. The proposal now moves on to the Senate, where it will likely be approved by early October. The text should not undergo additional changes, generating savings of BRL 865 billion over a ten-year horizon. With this chapter over, the Congress should now focus on other reforms that could contribute to better growth ahead, such as tax simplification. In the short term, the economy is still struggling to accelerate, so we continue to expect only modest growth of 0.8% in 2019 and 1.7% in 2020. Faced with this slow pace of economic activity and, now that the reform has evolved, lower risks, the central bank began the expected easing cycle, reducing 0.50 pp in July and signaling a similar cut for September. Also without major surprises on this front, we continue to forecast that the Selic rate will reach 5.00% a.a. by the end of 2019.



Global Economy
New tariffs reignite growth concerns 

• A new round of U.S.-China tariffs will put more pressure on the global manufacturing sector.

• We expect U.S. GDP growth to slow to 1.5% in 2020, and the Fed to cut rates by 75 bps in 2019.

• We have lowered our 2020 GDP growth forecast for China to 5.7% (from 5.9%). We expect the yuan to stay above 7.0 CNY/USD.

• In Europe, growth is likely to remain weak, which could prompt the ECB to cut rates and restart QE.

• In LatAm, rate cuts are about to become widespread.

• Metals prices are likely to fall, in line with the weak global growth.


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

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