Itaú BBA - Signs of improvement in the global economy

Global Scenario Review

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Signs of improvement in the global economy

November 8, 2019

Trade tensions between the US and China are de-escalating, but Latin American countries will have to deal with their idiosyncratic risks.

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


Global Economy
Lower risks, manufacturing likely to stabilize
US-China trade tensions are easing and global industrial production is likely to stabilize. 

Pension reform is approved, as economy shows signs of improvement
Pension reform has finally been approved, and economic activity is in a gradual, albeit healthy, process of acceleration, driven by the expansion of private credit.

In transition
Amidst tighter exchange rate controls, the newly elected president, Alberto Fernández, will have the immediate task of restructuring the federal government debt.

Weak growth calls for a bolder monetary response
We revised our GDP growth forecast for 2019 to 0.1% (from 0.3%), reinforcing our expectation that the central bank will increase the pace of monetary easing this month.

Turned upside down
President Piñera’s new social agenda and cabinet reshuffle only partially diffused the widespread social discontent. We now see a milder activity recovery in 2020. 

Constitutional crisis unfolds
Soft global economic activity is affecting Peru’s economy, while political uncertainty and fiscal execution delays also hinder growth. We expect GDP growth of 2.3% in 2019, down from 4.0% last year.

Resilient growth amid fiscal challenges
Retail sales continue to accelerate, leading us to upgrade our growth forecast for this year (to 3.3% from 3.0%) and the next (to 3.1% from 2.8%), despite continuing fiscal challenges.


Signs of improvement in the global economy

U.S.-China trade tensions are de-escalating, as a Phase 1 trade deal is likely to be signed in November, significantly reducing the risk of further tariffs until the next U.S. elections, at least. The chances of a no-deal Brexit are also receding. Indeed, the UK PM Boris Johnson reached a deal with Europe that was approved by Parliament, even though its actual implementation still depends on the results of the elections in the UK. With the reductions of these two risks, Fed policy easing is likely to support economic expansion, leading us to raise our U.S. GDP forecast to 1.7% (from 1.5%) for 2020. More broadly, global monetary policy easing in 2019 is likely to have a positive effect on global manufacturing activity in 2020. 

In LatAm, domestic events will limit the economic recovery in many countries of the region, despite the diminished global risks. Social unrest in Chile will likely undermine confidence and investment, more than offsetting the effects from reconstruction and expansionary fiscal measures. In Peru, the struggle between lawmakers and the president is also negative for capital expenditure. In Argentina, the elected government can intensify the exchange-rate controls and may extend consumer price controls, which can sharpen the recession. In Mexico, the weakening of U.S. manufacturing activity and ongoing uncertainty over trade and domestic policy directions will continue to stymie growth. The Colombian economy, however, continues to go against the tide of deceleration seen elsewhere in the region, supported by consumption. Finally, in Brazil, incoming data continues to show support to our expectation of a gradual economic recovery.

We see Brazil´s Social Security reform, approved in November, as a very important albeit insufficient step towards the consolidation of a new fiscal regime, with lower growth of public spending, in the country. Considering new measures being proposed to further contain mandatory expenditures, along with the maintenance of quasi-fiscal policy contraction agendas and the sale of assets, gross debt is expected to remain below 80% of GDP, and the public sector should once again record primary surpluses in 2022. Meanwhile, economic activity is in a gradual but healthy process of acceleration, driven by the expansion of private credit. In this context, we maintained our forecasts for economic growth rates, as well as for inflation and interest rates. But we have revised our forecasts for the exchange rate at the end of 2019 (to 4.00 from 3.90 BRL/USD) to reflect the disappointment with the transfer-of-rights oil auction and for the end of 2020 (to 4.15 from 4.25 BRL/USD), given the less uncertain global scenario.


Global Economy
Lower risks, manufacturing likely to stabilize

• U.S.-China trade tensions are de-escalating and the risk of a no-deal Brexit is declining

• U.S. recession risks are receding

• Europe: growth stabilizing at a low pace, close to potential

• China: stabilization around a gradual deceleration path

• Global manufacturing likely to stabilize 

• LatAm: Idiosyncratic risks come back into play


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

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