Itaú BBA - Green shoots in the global economy

Global Scenario Review

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Green shoots in the global economy

June 5, 2020

With signs of a slowdown in the covid-19 outbreak, economies are starting to recover.


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

Global Economy
After the fall
Early data indicate that economies are starting to rebound, as governments ease mobility restrictions and risks of new waves of the disease remain contained. We kept our 2020 GDP growth forecasts at 2.0% in China and -8.0% in Europe, but a better outlook for fiscal coordination tends to lower downside risks for the latter. In the U.S., we changed our forecast to -5.0% (from -3.3%) in 2020, but there are signs the economy has already started to recover.

Brazil
Early stabilization signs
A gradual economic recovery started in May, but risks of a worsening of the outbreak remain. We maintain our GDP forecasts at -4.5% and 3.5% for 2020 and 2021, respectively. We changed our inflation forecasts for 2020 to 1.8% – below the lower limit of the inflation target interval – and to 2.8% for 2021, incorporating cheaper electricity prices for this year. We still believe the Copom will lower the Selic rate by 75 bps at its next meeting, taking the base rate to a final level of 2.25% p.a. in 2020 (3.0% p.a. in 2021). 

Latina America
Our forecasts

 


Green shoots in the global economy 

As the covid-19 pandemic begins to show more consistent signs of deceleration across developed countries, early data from May indicate that their economies are starting to rebound. Governments continue to gradually ease social distancing measures, always wary to the risks of new waves of the disease – which appear to be contained, at least for now –, while strong policy stimuli issued amid the crisis remain supportive of the normalization. Assuredly, the recession will be deep, but the worst seems to be behind us – provided the pandemic has been contained.

In China, a V-shaped recovery in some key sectors reinforces our call for a 2.0% GDP growth in 2020 and 7.5% in 2021, while also helping to sustain commodity prices in global markets. In the U.S., we changed our GDP forecasts to -5.0% in 2020 (from -3.3% in the previous scenario) and to 4.0% in 2021 (from 4.5%), due to a worse-than-expected economic activity decline in recent months and prospects of a more gradual normalization until year-end. However, the economy already started to recover in May, and will be supported by strong policy stimulus. In Europe, reopening triggered a solid rise in mobility, even more so in recent days as risks of a second wave seem increasingly contained. We maintain our call for an 8.0% GDP drop in 2020 and 5.0% increase in 2021, but a better outlook for fiscal coordination, after the Germany-France proposal for a recovery fund, tends to lower downside risks.

The number of COVID-19 cases are still on the rise in Latin America, although wider testing is partly responsible for the increases. Due to weaker-than-anticipated data, we revised our 2020 GDP growth forecast for the region to -6.4% from -6.1%, but now expect a slightly higher growth in 2021, of 3.8%, from 3.7% previously. The sizable output gap and still-low oil prices will likely keep inflation low in almost all countries, allowing for further monetary policy stimulus in Mexico, Brazil and Colombia, while Peru and Chile will likely keep rates close to zero for longer.

In Brazil, while the gradual easing of social distancing measures may support, in theory, an economic recovery (which appears to have started in May), risks of a worsening of the outbreak remain. We kept our GDP forecasts for 2020 and 2021 at -4.5% and 3.5%, respectively. Our inflation forecasts, incorporating cheaper electricity prices for this year, are now at 1.8% for 2020 – below the lower limit of the inflation target interval – and 2.8% for 2021. Importantly, the National Monetary Council will choose the inflation target for 2023 until the end of the month, and we expect it to be 3.25% or even 3.00%. Finally, we kept our Selic benchmark rate forecast at the new record low of 2.25% for 2020 and at 3.0% for 2021. We reckon that, as it is an uncharted territory, the Central Bank must act with caution to avoid the risk of excessive monetary easing, which could affect asset prices, tighten financial conditions and become counterproductive.


 


Global Economy 
After the fall 

• China is experiencing a V-shaped recovery in its housing market and infrastructure investment, which is sustaining commodity prices.

• U.S.: We have lowered our 2020 GDP forecast to -5.0% (from -3.3%), but we believe that a recovery has started, supported by monetary and fiscal policies.

• Europe: Reopening with well-contained virus transmission and progress on the fiscal union project (recovery fund) will improve the region’s depressed economic outlook.

• As second-wave risks have not yet materialized, concerns have shifted to geopolitics and U.S. domestic politics. 

• Latin America: A gradual re-opening, amidst a risky environment.


 

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



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