Itaú BBA - Global recession and its consequences

Global Scenario Review

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Global recession and its consequences

April 7, 2020

Given the evolution of the coronavirus outbreak, we lowered our global growth forecasts, as well as for the US, Europe, China and LatAm.


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

 

Global Economy
Effects of the pandemic worsen, and risks remain tilted to the downside
We have revised our global growth forecast down to -1.1%, from the previous -0.4%, given the global spread of coronavirus, measures taken to contain the outbreak and the emerging economic impact. Economic policy responses may partially mitigate deteriorating financial conditions and the impact of a sudden stop in economic activity, but the repercussions will likely be severe (albeit temporary).

Brazil
Deeper shocks on heightened uncertainties
In a scenario of economic contraction and expectations of lower inflation, the central bank will likely cut the Selic benchmark interest rate to 2.5% p.a. in 2020, notwithstanding recent exchange rate depreciation. On the fiscal side, we expect temporarily larger deficits to pay for measures to mitigate the impacts of coronavirus. The magnitude of the shock will likely lead to a much deeper recession in 2020 than seen in 2009.


 


Global recession and its consequences 

We have revised our GDP growth forecasts to -1.1%, from the previous -0.4%, at the global level; to 2.5% from 3.3% in China; to -3.2% from -2.2% in Europe; to -1.5% from 0.1% in the U.S.; and to -3.5% from -2.2% in Latin America.

This revised scenario accounts for the evolution of coronavirus contagion on a global scale, as well as the public health responses that have been adopted. Events in the past few weeks have shown that, during the surge phase of the pandemic, authorities are naturally prioritizing public health through social distance measures that affect economic activity. Lockdown processes tend to vary significantly in intensity, both between and within countries. One of the few similarities seen around the world is the duration of the lockdowns, at least four weeks or longer if cases continue to rise.

The coronavirus outbreak and, to a lesser extent, lower oil prices are still driving a sharp deterioration in asset prices in Latin America. Economic activity in the region will likely fall by 3.5% this year, as social distancing measures – necessary, given the outbreak – are expected to cause GDP to implode in the second quarter. High public debt levels should limit fiscal responses, but countries seem resigned to live with higher debt levels for some time and further monetary policy loosening is underway. Even though the coronavirus outbreak initially represents a supply shock, monetary policy should (and is) being used to increase the probability that demand normalizes once the worst has passed. However, the sharp weakening of currencies in Latin America bars an even more aggressive and rapid response. Even so, further rate cuts will likely come. We expect strong GDP growth in 2021, mainly due to a favorable base effect (we expect to see normalization as early as the second half of 2020). 

In Brazil, we have lowered our growth forecast to -2.5% in 2020 (from 1.8% before the onset of the pandemic), due to the negative effects of the shock in the first half of the year. Given expectations for a severe temporary impact, we revised our estimate for 2021 to 4.7%. The BRL will likely remain under pressure in the coming months, but we see room for appreciation later in the year, once the shock dwindles, and forecast that the currency will end 2020 at BRL 4.60/USD (from the previous estimate of BRL 4.15/USD) and 2021 at BRL 4.15/USD (no change). Following the drop in fuel prices and acute deterioration of economic activity in the first half of the year, we revised our inflation forecast for 2020 down to 2.7%, from the previous 2.9%, while maintaining our 2021 forecast of 3.3%. In this scenario, we see room for the central bank to cut interest rates more aggressively in response to the shock: we expect the Selic rate to fall to 2.5% p.a. by the end of 2020 and close 2021 at 3.0% p.a. On the fiscal side, we expect a much larger temporary primary deficit in 2020 (8.0% of GDP, vs. 3.1% previously) to pay for further measures required to tackle the health crisis. More importantly, we assume the increase in the deficit in 2020 will be temporary, otherwise the scope for additional monetary easing is quite limited or, in an extreme scenario, nonexistent.


 


Global Economy 
Effects of the pandemic worsen, and risks remain tilted to the downside 

• Following the spread of coronavirus and social insolation measures in the U.S., Europe and emerging markets, we have revised our GDP forecasts to -1.1% from -0.4% globally; 2.5% from 3.3% in China; -3.2% from -2.2% in Europe; -1.5% from 0.1% in the U.S.; and -3.5% from -2.2% in Latin America.

• Sizable economic policy responses in developed economies should aid a GDP recovery in 2H20, but only if health policy responses can better cope with the virus. Until then, risks will remain tilted to the downside as the duration of the pandemic remains uncertain and economic disorder continues to proliferate.

• Latin America: emerging markets and the region have less economic policy room to deal with the pandemic and, therefore, face greater risks.


 

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



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