Itaú BBA - Fewer global headwinds early in 2020

Global Scenario Review

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Fewer global headwinds early in 2020

January 17, 2020

Lower risks will likely lead to higher growth this year

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


Global Economy
Better growth, U.S. elections risk
We revised our global GDP forecast to 3.2% in 2020 (from 3.1%), an improvement from 3.0% in 2019. Elections in the US are the main risk.

Benign inflation makes room for rate cuts
We believe that Brazilian Central Bank inflation forecasts are consistent with further monetary stimuli, despite the temporary price pressure observed at the end of 2019.

Higher taxes and more controls
President Fernández launched a fiscal package that increased export taxes, and included further measures to control the exchange rate, such as taxing purchases of dollars. 

Minimum wage hike prevents a bolder monetary policy response
Economic weakness, well-behaved exchange rate and low headline inflation support gradual rate cuts, but persistent core inflation and risks associated with domestic policies, such as the minimum wage hike, stand in the way of a bolder policy response.

Some semblance of normalcy
Following the social unrest that brought the country to a halt in October and November, the government’s response has led protests to lose momentum, reducing operational disruptions at the start of 2020.

Relaxing the fiscal stance
The Ministry of Finance smoothed the fiscal-consolidation path with looser targets for 2021, 2022 and 2023.

Risks moderate at the turn of the year
The renewed approval of the tax reform, along with high central bank profits and a large dividend payout from Ecopetrol, means that achieving the fiscal target for this year is more likely.


Fewer global headwinds early in 2020

The year began with a better outlook for global economic activity, with reduction of the major risks that affected markets in 2019. The signing of the first phase of the US-China agreement on trade helped to lower uncertainty, although strategic rivalry remains. The UK and Europe should also reach an agreement regarding Brexit by the end of this year. Thus, the main source of uncertainty in 2020 is likely to be the US presidential election, amid increasingly polarized economic policy proposals.

With this more benign external scenario, we improved our global GDP growth forecast for 2020 (to 3.2%, from 3.1%), driven mainly by the expectation of better economic activity in China and the US. We forecast 6.0% growth in China this year, from 5.7% in the previous scenario. The US, in turn, is expected to grow 2%, with stable interest rates throughout the year. Europe is likely to continue to grow slowly, close to potential, as government stimulus will likely be insufficient to substantially improve economic activity in the region.

In Latin America, countries facing social unrest at the end of 2019 encountered a calmer environment at the turn of the year. Easing tensions in Chile and Colombia supported the appreciation of both currencies and improvements in the region's asset prices as a whole. The spotlight now turns to economic activity. In Chile, the effects of the protests and the still-high uncertainty continue to affect data, but fiscal and monetary stimuli should improve the outlook. In Colombia, growth should be close to potential. In Mexico and Peru, activity indicators show no signs of a consistent recovery, but the better global scenario is expected to help both countries throughout the year. Meanwhile, in Argentina, uncertainty will likely continue to weigh on economic activity.

In Brazil, we maintained our expectation of gradual acceleration, and we expect 1.2% GDP growth in 2019, 2.2% in 2020 and 3.0% in 2021. We also kept our exchange rate forecasts unchanged at 4.15 reais per dollar for both 2020 and 2021. Regarding inflation, lower regulated price readjustments led us to forecast 3.3% for the IPCA in 2020, from 3.5% in the previous scenario. For 2021, we kept our inflation expectation at 3.5%. As for monetary policy, we continue to expect even lower interest rates ahead, with the Selic rate reaching 4.0% by the end of this year.


Global Economy
Better growth, U.S. elections risk

• We revised our global GDP forecast up to 3.2% in 2020 (from 3.1%), an improvement from 3.0% in 2019.

• U.S. will likely grow 2%, with the Fed on hold. Elections are the main risk.

• China: with less trade risk, we see 6.0% growth in 2020 (previously 5.7%), with CNY appreciating to 6.80.

• Europe still lagging behind.

• Latin America: a calmer environment.


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

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