Itaú BBA - Cushioning the fall

Global Scenario Review

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Cushioning the fall

March 6, 2020

Economic policy responses may mitigate financial tightening given the global outbreak of the coronavirus, but downside risks remain high.

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


Global Economy
A shock to growth
We revised our forecasts for global growth to 2.7% from 3.1%, given the global outbreak of the coronavirus. Economic policy responses may mitigate financial tightening, but downside risks remain high.

Copom: reacting to uncertainty
The BC signaled that it could act to mitigate the effects of the coronavirus. Thus, we change our forecast for the Selic rate to 3.75% in 2020 and 4.0% in 2021. We also expect lower GDP growth in 2020 (1.8%, from 2.2%), due to weaker data in 1Q20 and to the global slowdown.

Playing hardball
Near the self-imposed deadline for the debt-restructuring offer, the government has indicated that bondholders must prepare for frustration. We believe that a protracted negotiation will increase the odds of missing dollar-debt payments before an agreement is reached.

Fed outweighs domestic risks
We expect Banxico to cut its policy rate by 50 bps this month, given the Fed cut and slower global growth.

The calm before another storm?
Besides a weaker global economy, domestic uncertainties (as highlighted by calls for more protests in March) will likely curb growth.

Further monetary easing
Feeble economic activity, rising downside risks for global growth, below-target inflation and the recent rate cut by the Fed increase the odds of further easing by the BCRP. We now expect two 25-bp cuts to the policy rate, bringing it to 1.75%.

Global risks to growth recovery
An improving labor market and historically high industrial business confidence point to growth stabilization in 1Q20. We see growth of 3.1% this year, but the global slowdown remains an important risk.


Cushioning the fall

Initially concentrated in China, the new coronavirus continues to spread across the globe, reaching more than 80 countries in all regions. In addition to being a major public health problem, the epidemic continues to affect asset prices and global production chains. To mitigate the impacts of the epidemic on the economy and financial conditions, calls for more stimulating economic policies are also growing. The Fed reduced the US economy's basic interest rate in an extraordinary meeting, and a further reduction is likely on the way. Other central banks have also followed or should still follow in the same direction.

In this context, we revised our projection for world growth to 2.7%, compared to 3.1% in the previous scenario. Economic policy responses will help to cushion the decline, but the downside risks to the scenario remain. We have reduced our expectations of economic growth for China, Europe and Latin America. The United States seems, in our view, more resilient at this point and, despite a small slowdown in the short term, it is expected to recover more quickly in the quarters ahead due to monetary stimulus.

In Latin America, the impacts of the epidemic will occur in a context in which economic growth was already frustrating. We reduced our growth projections for Brazil, Mexico and Peru. Few countries in the region have room for fiscal stimulus, but there is room for further monetary easing. We expect interest rate cuts in Brazil, Mexico, Chile, Peru, and, although we project constant interest rates in Colombia, we recognize that the chances of a cut in the country have increased substantially with the new prospects for the global economy.

In Brazil, the Central Bank has signaled that it may take steps to mitigate the effects of the coronavirus, which opens the door for further interest rate cuts ahead. Thus, we expect the Selic rate to be cut again by 0.25 p.p. in March and to end this year at 3.75% p.a. and 2021 at 4.0% p.a. (compared to 4.25% and 4.5% in the previous scenario, respectively). As for economic activity, due to weaker data in the first quarter of this year and the global slowdown, we forecast growth of 1.8% in 2020 (compared to 2.2% previously).


Global Economy 
A shock to growth 

• The outbreak of the coronavirus has stabilized in China, but it has now spread globally. 

• We revised our global GDP forecast to 2.7% from 3.1%: China to 5.3% from 5.8%, Europe to 0.6% from 1.0%, U.S. no change at 2.0%, LatAm to 0.8% from 1.1%. 

• Policy responses mitigate financial tightening, but downside risks to the outlook remain. 

• Latin America: Using a sizable portion of monetary policy space.


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

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