Itaú BBA - One step closer to 'normality'?

Global Scenario Review

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One step closer to 'normality'?

July 3, 2020

Despite the risk of new outbreaks, the global economy continues to recover. In Brazil, economic activity may have reached a floor in April.

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

Global Economy
Recovery in a time of risk
New cases of coronavirus are spiking again in the Americas, but deaths are growing less than in the first surge. If death rates remain contained, the global reopening might slow down in July but will go on. For now, recovery continues in China and in Europe. In Latin America, the re-opening of economies has been gradual and bumpy.

Signs of stabilization, but uncertainties remain
There are signs of stabilization in the spread of the virus, while preliminary data indicates that economic activity may have reached a floor in April. But the reopening of the economy will be gradual and uneven across states. We maintained our projections for GDP growth, foreign exchange, inflation and interest rates, but now we expect larger primary deficits in 2020 and 2021.

Latina America
Our forecasts


One step closer to “normality”? 

The global economy continues to recover from the coronavirus-induced collapse, even though the outbreak has not exactly abated at an aggregate level. While much of the developed world and some U.S. states have reached what seems to be the late stage of the epidemic cycle, some countries and regions are still struggling with intense surges and will probably continue to experience a high number of new cases for a while. Second-wave concerns have come and gone in countries like China and Germany, and are still present in the U.S., but we see the current surge rather as a late first wave, since states that were already hit hard still have well-behaved contagion levels. Importantly, new deaths are increasing at a more moderate pace, as the epidemic now hits regions with younger populations, but also because healthcare systems are no longer overwhelmed and medical treatment has already improved. If death rates remain contained, the global reopening will likely continue, as recent research shows that deaths are the main driver of social isolation.

Confirming the trend anticipated by alternative indicators (such as our Itaú Daily Activity Tracker - IDAT), more traditional data, such as PMIs, retail sales and industrial production are starting to paint a clearer picture of how the economy is bouncing back – with a V-shaped recovery in Chinese housing and infrastructure and strong consumption figures in Europe being some of the latest positive news. The outlook in the U.S. is a bit more uncertain, at least in the short term, since falling mobility as a response to the recent spike in contagion may lead to a softer patch in July. Looking a few more months into the future,  electoral noise might constitute a drag to the economy as well, since there are concerns regarding Biden’s possible policy agenda, and Trump’s reaction to slimmer chances of victory may also be a key driver of policy instability.

In Latin America, the re-opening has been gradual and bumpy, amid still-growing COVID-19 numbers. Brazil, Peru, Mexico and Colombia are gradually lifting restrictions, while Argentina and Chile had to stiffen distancing measures. Because the reopening has been slower than we expected, and taking into account a sharper economic second quarter contraction, we reduced our growth forecasts for most countries we cover. We now see the region’s GDP falling by 7.2% this year (from 6.4% in our previous scenario). For 2021, we now see a 4.1% recovery (3.8% previously).

Brazil is still the epicenter of COVID-19 cases in the region, with relatively stable deaths but rising cases, as the outbreak moves to smaller cities and regions that were less affected so far. Reopening is set to be a gradual and uneven process. Nonetheless, available data show that the economy hit a bottom in April and has been since in an upward trend that creates positive momentum for the third quarter, and supports our above-consensus -4.5% forecast for GDP growth in 2020. We see, however, growing fiscal risks, linked to government expenditure with social programs – for both this year and the next. We therefore continue to expect a more depreciated exchange rate at the end of 2020, at BRL 5.75/USD, and see no further rate cuts in the Selic rate, as the combination of better economic activity and increased concern with public accounts will likely lead the Copom to stay on hold for the remainder of the year.


Global Economy 
Recovery in a time of risk

• The spread of the coronavirus continues with extensive contagion in the Americas, but death rates have been lower than in the first surge in March-April.

• China continues to recover, with the housing market and infrastructure investment sustaining commodity prices.

• U.S. recovery is ongoing but the virus spread and election uncertainty pose risks.

• Europe’s recovery is gaining strength.

• Latin America: a gradual re-opening.


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

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