Itaú BBA - Global outlook continues to improve

Global Scenario Review

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Global outlook continues to improve

December 14, 2020

Global scenario points to a weak dollar and more inflows to emerging markets. In Brazil, the spending ceiling will be met in coming years.

For the version with all charts and tables, please open the attached pdf file

 

Global Economy
EM inflows resume amidst global recovery and ample liquidity
Contagion continues to surge in the U.S., but there are vaccination campaigns already starting there and in the U.K., while in Europe they are going to start in the next month. An on-going global recovery, fewer U.S. policy risks and a dovish Fed are factors that favor a weak USD ahead and lead to a more benign scenario for Emerging Market inflows.

Brazil
The spending ceiling will be maintained, but reforms are crucial
Recent increases in new deaths and hospitalizations point to a second COVID-19 wave in the country. Regarding the fiscal outlook, we expect the spending ceiling to be maintained in the next years, and we improved our primary deficit forecasts for this year and the next. We also changed our exchange rate forecast for 2021, to 4.75 BRL/USD (from 5.00), incorporating a more benign global scenario for risk assets and lower fiscal uncertainty in Brazil.

Latin America
Our Forecasts


Global outlook continues to improve

The spread of the Covid-19 remains a concern for the global economy, with contagion reaccelerating in the U.S., while restrictions imposed in Europe seem to be having an impact in the number of cases. However, vaccinations are starting in the U.K. and in the U.S., and are likely to begin in Europe by early January. Other vaccine candidates, with more ample distribution in Emerging Markets, are also expected soon. In our view, the worldwide distribution of vaccines in 2021 is set to finally put an end to the Covid-19 crisis and consolidate the full recovery of the global economy.

In the U.S., restrictions remained local and we expect recovery to continue. We made a slight adjustment in our GDP forecast, to -3.6% for 2020 (from -3.5%), but we maintained it at 4.0% for 2021. Going forward, we expect that “Bidenomics”, constrained by the Senate, will mean modest fiscal stimulus, lower regulation risks and more predictable policies. In Europe, we expect restrictions to be slowly lifted by early January, while vaccines, less political uncertainty and new ECB stimulus will be the basis for a recovery in 2021. We kept our GDP forecasts for Europe at -7.4% this year and at 5.0% for 2021. We also see the EUR/USD at 1.20 for 2020 and still expect an appreciation to 1.25 in 2021. In China, economic activity picked up further in the fourth quarter and we now expect growth in 2021 at 8.5% (from 7.5%). 

The global recovery, the lessening of U.S. policy risk and a dovish Fed are factors that favor a weak USD. Indeed, portfolio inflows to emerging markets already resumed in November and will likely remain strong in 2021. In Latin America, specifically, external tailwinds are benefiting asset prices, more than offsetting domestic uncertainties. Some countries in the region (such as Brazil, Chile and Peru) have recently experienced an uptick in inflation, reflecting high commodity prices, past exchange rate depreciation and supply disruptions of some products due to the pandemic. But a wide negative output gap and stronger exchange rates are likely to keep inflation under control in 2021, and monetary policy in the region is set to remain expansionary as a wide negative output gap and stronger exchange rates are likely to keep inflation under control in 2021.

In Brazil, the number of daily deaths caused by Covid-19 also increased in November, after more than two months in decline. Still, we maintained our projection of a 4.1% drop in GDP for 2020, and we forecast growth of 4.0% for 2021, with an upward bias. In the first half of next year, the reduction in emergency aid should impact consumption, but we expect the recovery to gain traction when vaccination starts in the country. On the fiscal side, we improved our primary deficit estimates from 11.7% to 10.6% of GDP in 2020 and from 2.5% to 2.1% in 2021. Despite the challenging scenario, we expect the spending ceiling to be met in 2021 and 2022, gross debt to recede in the coming years, reaching 89% of GDP in 2020, 84% in 2021 and 83% in 2022, compared to 74% of GDP in 2019. This framework of lower fiscal uncertainty, in addition to the resumption of economic growth, a more benign global scenario and an already adjusted balance of payments, suggests room for appreciation of the exchange rate: we maintained our estimate at R$ 5.25 per dollar at the end of 2020, but we revised the exchange rate at the end of 2021 to R$ 4.75 per dollar (compared to R$ 5.00 previously). As for inflation, with the increase in energy prices, we now forecast a 4.4% rise in consumer prices (IPCA) in 2020. Given higher inertia, we now expect inflation to reach 3.3% in 2021. Regarding monetary policy, we expect the Selic rate to be maintained at 2.0% until mid-2021, rising to 3.50% before the end of the year. Even so, there are risks of an early hike, already in the first semester, as the central bank continues to closely monitor further inflationary surprises. 

 


Global Economy
​​​​​EM inflows resume amidst global recovery and ample liquidity

Contagion continues to surge in the US, but vaccinations are already beginning there and in the UK, and should start soon in other European countries.
US: positive 4Q GDP despite virus surge; Bidenomics with Republican Senate favors modest fiscal stimulus and lower regulatory risk.
Europe: we expect a contraction of 3.2% in 4Q20. Even so, vaccines, lower political uncertainty and new ECB stimulus will likely help the recovery in 2021.
China: strong recovery ahead, and we now expect the 2021 GDP to increase 8.5% (from 7.5% previously). We see withdrawal of stimulus in 1H21, with activity deceleration in mid-2021.
Emerging Markets: the global recovery, less US policy risk and a dovish Fed favor weak USD and ample EM inflows.
Latin America: external tailwinds offset domestic political uncertainty.


For the version with all charts and tables, please open the attached pdf file



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