Itaú BBA - Special: Global contagion and its consequences

Global Scenario Review

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Special: Global contagion and its consequences

March 20, 2020

This special scenario review stems from the evolution of coronavirus on a global scale, which may lead the world to recession in 2020.


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

 

Global economy
The pandemic’s effects
We revised our forecast for global growth to -0.4% from 2.7%, given the spread of the coronavirus globally and measures taken to contain the outbreak. Economic policy responses can mitigate worsening financial conditions and the impacts of a sudden stop in economic activity, but the effects (albeit temporary) tend to be severe.

Brazil
Responding to the crisis
In a scenario of economic contraction and expectations of lower inflation, the central bank will likely cut the Selic benchmark interest rate to 3.25% p.a. in 2020, notwithstanding recent exchange rate depreciation. On the fiscal side, we expect temporarily larger deficits to encompass measures to fight the impacts of the coronavirus.


 


Global contagion and its consequences

We reviewed our GDP growth forecasts to -0.4% from 2.7% at the global level; to 3.3% from 5.3% in China; to -2.2% from 0.6% in Europe; to 0.1% from 2.0% in the USA; and to -2.2% from 0.8% in Latin America.

Our scenario review stems from the evolution of coronavirus contagion on a global scale, as well as the likely public health responses that are being adopted. The events of the past few weeks show that it will be very difficult to avoid the choice between prioritizing public health and protect economic activity in the short term. A large majority of governments will, in this context, prioritize the health of the population, adopting, as in China, measures of social distance that severely affect economic activity.

The coronavirus outbreak and, to a lesser extent, lower oil prices have produced a sharp deterioration of asset prices in the region. Economic activity in Latin America will likely fall by 2.2% this year, as social distancing measures are expected to cause a collapse of GDP in the second quarter. High public debt levels prevent a strong fiscal response, but further monetary policy loosening is underway. Even though the coronavirus outbreak represents mostly a supply-shock, monetary policy should (and is) being used to increase the probability that demand normalizes once the outbreak is behind us. However, the sharp weakening of currencies experienced by Latin America is preventing a response as aggressive and as fast as those seen in the developed world. Still, further rate cuts will likely come.  We expect strong GDP growth, mainly due to a favorable base effect (indeed, we expect normalization already during the third quarter of 2020). 

In Brazil, we reduced our growth forecast to -0.7% in 2020 (from 1.8%), due to the negative effects of the epidemic in the first half of the year. As we expect a temporary impact, we revised our estimate for 2021 to 5.5% (compared to 3.0%). The BRL will likely remain under pressure in the coming months, but we see room for appreciation, as the shock is dissipated, and we forecast that the currency will end 2020 at 4.60/USD (from 4.15) and 2021 at 4.15/USD (no change). With the drop of fuel prices and worsening economic activity in the first half of the year, we revised down our inflation forecast for 2020, to 2.9% from 3.3%, and for 2021, to 3.3% from 3.5%. In this scenario, we see more room for the central bank to cut interest rates in response to the shock: we now expect the Selic rate to be cut to 3.25% pa by the end of 2020 and close 2021 at 3.75% p.a. On the fiscal side, we expect temporarily larger deficits (3.1% in 2020 and 0.8% in 2021), in order to accommodate measures to tackle the impacts of the coronavirus.


Global Economy 
The pandemic's effects

• Coronavirus contagion stabilized in China and other Asian economies, but the disease has spread globally.

• We revised our GDP growth forecasts: to -0.4% from 2.7% globally; to 3.3% from 5.3% in China; to -2.2% from 0.6% in Europe; to 0.1% from 2.0% in the U.S.; and to -2.2% from 0.8% in Latin America.

• The revisions are due to the fact that governments — acting correctly, in our view — will prioritize public health, even though the short-term economic costs tend to be very large, albeit not permanent. 

• Economic policy responses mitigate the financial tightening resulting from the shock and will be very important to prevent even worse scenarios for the global economy.

• Latin America: there is not much room for fiscal policy responses, but further monetary policy easing is underway.


 

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



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