Itaú BBA - The recovery lingers on

Global Scenario Review

< Back

The recovery lingers on

October 2, 2020

Global recovery on track, despite increased risks in the short term. In Brazil, the recovery continues, but fiscal impasse is a risk.

For the version with all charts and tables, please open the attached pdf file

Global Economy
Short-term risks unlikely to derail global recovery
We still see the global recovery on track, despite increased risks in the short term. In Europe, the second wave of virus infections is less lethal and full lockdowns will likely be avoided. In the U.S., a fiscal package before the elections is unlikely, and a contested election is a risk, but neither candidates seem to be a threat to the global recovery. Going forward, vaccines will remain crucial, and we see an emergency approval in the U.S. and Europe by year end.

Brazil
Economy is recovering, but fiscal outlook is unclear

There are signs of improvement in the coronavirus contagion, and risks of a second wave seem contained, which should continue to help the economic recovery. Fiscal uncertainties, however, remain high, as pressure for higher social expenditures next year and the maintenance of the spending ceiling in its current format may lead to a stand-off.

Latina America
Our Forecasts 

 



The recovery lingers on
​​​​
​​​
Although a second wave of coronavirus continues to advance across Europe, odds of strict lockdowns in the region remain limited, as hospitalizations have increased only moderately and the numbers of new fatalities remain low. The virus summer surge also waned in the U.S., and, in Latin America, contagion continues to gradually fall. The global recovery is thus set to endure, but not without some short term risks – while neither candidate seems to threat the economic pickup, a contested presidential election in the U.S. is a source of uncertainties, given the ever-more relevant votes by mail and the possibility of a closer race ahead. In any case, for a complete economic recovery, vaccines remain key. And, in that front, the main frontrunners will likely begin getting the necessary approvals by year-end, not earlier.

In Latin America, economies continue to open up, and activity is posting strong gains at the margin. As we have been highlighting, we expect Brazil’s GDP to contract less this year than those of other major economies in the region, on the back of less-rigid social distancing measures and strong policy stimuli (at the other end of the spectrum, Peru, Mexico and Argentina will likely be among the worst performers). Despite more positive news on the activity front, asset prices in the region performed poorly in the last month, as the aforementioned risks added to domestic (read: political and/or fiscal) issues. Exchange rates remain far weaker than before the pandemic, contributing to an important turnaround of the countries’ external accounts.

For Brazil, we left most of our major macro forecasts unchanged. There are signs of improvement in the coronavirus contagion in the country and risks associated with a second wave seem contained, helping the economic recovery to continue and supporting our milder-than-consensus call of a 4.5% GDP drop this year (+3.5% in 2021). Concerns with inflation are likely to gradually wane in the medium term, as the effects of the wide output gap will likely persist beyond recent pressures on food prices. Fiscal uncertainties, however, remain high, as pressure for higher social expenditures meets the constraint posed by the spending ceilling, the major fiscal anchor of the country. As so, we expect the benchmark rate to remain at 2.0% until the middle of the next year, rising to 3.0% at the end of 2021, conditional on the continuation of the fiscal regime.

 




Global Economy
Short-term risks unlikely to derail global recovery


As risks mount for the next few months, concerns have increased, but we still see the global recovery on track.

In Europe, the second wave of contagion is less lethal, and full lockdowns will likely be avoided. We continue to expect GDP at -7.0% for 2020 and 6.0% for 2021. We adjusted our EUR/USD forecast to 1.22 in 2020 (from 1.25), but we maintained it at 1.25 for 2021.

In the U.S., a fiscal package before the election is unlikely, but savings rates and job-market improvement will sustain positive consumption growth in 4Q20. We changed our GDP forecast to -4.0% from -5.0% for 2020, and maintained it at 4.0% for 2021.

A contested U.S. election is a risk, but neither candidate seems to be a threat to the global recovery. 

China will likely grow 2.3% in 2020 and 7.5% in 2021, even if the new Five-Year Plan reduces its medium-term growth targets to 5.0%-5.5%.  We revised our CNY/USD forecast to 6.75 in 2020, down from 6.85.

Vaccines remain crucial, and we still see an emergency approval in the U.S. and Europe by year end.

Latin America: economies are opening up, but exchange rates are not benefiting yet.



For the version with all charts and tables, please open the attached pdf file



< Back