Itaú BBA - Policymakers to the rescue

Global Scenario Review

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Policymakers to the rescue

February 8, 2019

Policymakers' decisions provide some support for emerging market asset prices

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

Global Economy
Emerging market relief
Signs of an easier monetary policy stance in the U.S., a new round of stimulus in China and the likelihood of a trade deal provide some support for emerging market asset prices.

Postponing rate hikes
With still-weak growth and a more accommodative Fed, rate hikes in the region are likely to be postponed.

Softer growth and lower inflation
We reduced our GDP growth estimates to 1.1% in 2018 and 2.0% in 2019 (from 1.3% and 2.5%, respectively). Due to the slower recovery, we now expect inflation to print 3.6% this year and the next.

Progress on the monetary front
Interest rates and inflation have both fallen significantly, but are still at high levels. Faster disinflation remains a challenge, due to inertia and utility price hikes.

AMLO dealing with his first troubles
Gasoline shortages, strikes in manufacturing firms and railways blockades will likely disrupt economic activity in the beginning of the year.

A more patient central bank
We expect less tightening this year relative to our previous scenario (to 3.5% vs 3.75% before), as the board adopts a more patient approach given a still-risky external outlook.

Activity improves amid global risks
We forecast 4.0% GDP growth in 2019, supported by terms of trade (assuming that trade tensions dissipate) and a still-expansionary monetary policy.

A still-weak and unbalanced economy
Spending adjustments need to be pursued to meet this year’s ambitious fiscal target. Current data hint that the activity recovery is yet to consolidate.


Policymakers to the rescue

After fears of a global downturn sent jitters through financial markets, signs of an easier monetary policy stance in the U.S., a new stimulus round in China and the increased likelihood of a trade deal that averts further tariff hikes between the G2 brought some relief to emerging market assets. 

We understand that the Fed’s guidance shift is aimed at supporting financial conditions and limiting downside risks to U.S. growth. Likewise, the expanded pipeline for fiscal and monetary stimuli in China should prevent the deceleration from extending deep into 2019. But the success of growth-stabilizing measures in both countries is contingent on some progress in the trade talks. Meanwhile, economic and political concerns in Europe will likely continue to bring volatility with every new development in France, Germany and Italy, among others.

The abovementioned policy changes and the resulting improvement of financial conditions are welcome in Latin America, as growth remains weak in most of the region. Less pressure coming from the Fed means that central banks in the region have more room to maneuver. We do not expect any policy rate cuts in the region, but hikes are now likely to be postponed for a while.

Brazil does not seem to differ much from the regional trend of soft growth. Economic activity lost momentum in the fourth quarter of last year, leading us to revise the GDP growth estimate to 1.1% in 2018 (from 1.3%). We also see a slower growth in 2019 (now 2.0%, down from 2.5%) due to a worse starting point and lackluster recent figures, somewhat weaker global growth and less-favorable supply conditions in the agricultural and energy sectors. Added to a slightly more appreciated exchange rate, weaker growth means even lower pressure on inflation, which we expect to remain below-target at the end of 2019 and 2020, at 3.6% in both years. In this context, we believe that the Central Bank will keep its policy rate stable at 6.5% pa in their next meetings. However, this scenario is more uncertain than usual: with the beginning of the legislative year, discussions about the pension reform grow to even higher prominence. We assume the approval of a package with a similar fiscal impact to the one that has been recently discussed in Congress. Deviations from this basic hypothesis may lead to substantial changes in our scenario; be it in the positive direction, in the case of a reform that is more comprehensive than expected; or in the negative direction, in case of frustration. 


Global Economy
Emerging market relief 

• Fed likely to remain on hold in 1H19.

• China stimulus to stabilize activity in 2Q19.

• U.S.-China likely to reach a trade deal that averts further tariffs.

• Euro area growth weakness continues; we lowered our GDP forecast to 1.2% from 1.5% for 2019.

• Emerging market FX and local rates likely to be helped by U.S.-China policy responses.

• Iron ore short-term gains due to supply uncertainty.


Postponing rate hikes

• Signs of an easier monetary policy stance by the Fed and a new round of stimulus measures in China are supporting the LatAm asset prices. 

• Most economies in LatAm remain weak, consistent with activity data from the core economies. 

• Given weak growth and a more accommodative policy stance by the Fed, central banks in the region have more room to maneuver. While we do not expect policy rate cuts in the region, rate hikes for now are likely to be postponed. 


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

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