Itaú BBA - Trade war: From bad to worse

Global Scenario Review

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Trade war: From bad to worse

June 14, 2019

The increasing trade tensions between U.S. and China is likely to weigh further on global growth.

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

Global Economy
Global growth slowdown, Fed insurance cuts
The trade war is likely to weigh further on global growth, leading to a new cycle of monetary stimulus from major central banks.

Pension reform moves forward amid global headwinds
Accounting for the external scenario deterioration and slower-than-expected economic activity in the first half of the year, we lowered our growth forecasts for 2019 (to 0.8% from 1.0%) and 2020 (to 1.7% from 2.0%).

Fighting for the center
In an attempt to draw votes from the center and break the Macri-Kirchner polarization, Cristina Kirchner announced that she will run as vice-president in the upcoming election. Despite the strategy, polls are broadly unchanged so far, and point to a tight race.

Trump’s temporary trade war
U.S. and Mexico reached a deal to avoid the imposition of tariffs threatened by Trump as a way to halt illegal immigration, but uncertainty is likely to remain for longer.

An insurance move
Following the sluggish start of activity indicators at the beginning of the year and low inflation, the Central Bank surprised market expectations and cut the policy rate by 50 bps in June.

Vote of confidence granted
President Vizcarra earned the vote of confidence from Congress to conduct the political reform, but political turmoil is expected to persist, as legislators will probably try to propose changes.

Rate cuts in the pipeline, despite vulnerabilities
In spite of the uncertain fiscal outlook and wide current account deficit, the expected change in monetary policy abroad, well-behaved inflation and a widening output gap point towards additional monetary stimulus ahead



Trade war: From bad to worse

In our view, trade and tech tensions between the U.S. and China have intensified too much in recent weeks for Presidents Trump and Xi to move back to a deal at the G20 meeting (Jun 28-29), in Japan. Therefore, we are now considering a full trade war between U.S. and China in our scenario, whose direct impact can trim global GDP growth by 0.4 p.p., pulling it down to 2.9% in 2020. In that context, the Federal Reserve Bank (Fed) and European Central Bank (ECB) are likely to implement insurance stimulus, given the negative global shock, and several other central banks are likely to follow as well. In particular, we now see the Fed implementing 75-bp insurance cuts, starting in July. In China, the trade war will slow down growth to 6.0% in 2019 and to 5.5% in 2020, and stimulative policies are bound to take place.  

For Latin America, trade war intensification comes at a time when activity in the region is already fragile. The looser monetary policy stance by the Fed and other major central banks will likely curb the depreciation of LatAm currencies against the dollar. In this environment, central banks will find room to increase monetary stimulus. Indeed, the central bank of Chile has already surprised market expectations in June by cutting its policy rate by 50 bps, and we now see rate cuts in Peru and Colombia before year-end. In Mexico, the central bank maintains a conservative stance – however, given the likely deceleration of the economy, we expect an easing cycle to start in 4Q19. Finally, in Brazil, we see room for a larger easing cycle than we were previously expecting (150 bps vs. 100 bps in our previous scenario), but we still believe that uncertainty over the approval of pension reform must abate more substantially before the Selic rate is brought down.

We also reduced Brazil´s growth forecasts for 2019 (to 0.8% from 1.0%) and 2020 (to 1.7% from 2.0%), incorporating a sharper deceleration of the global economy. Given the outlook of slower growth in public revenues, our estimates for the primary budget deficit worsened to 0.9% of GDP in 2019 (from 0.8% previously), and to 1.2% of GDP in 2020 (from 1.1%). We kept our year-end forecast for the exchange rate at BRL 3.80 per dollar in 2019, but, with the worsening global scenario, we revised our estimate for 2020 to BRL 4.00 per dollar (from 3.90). Our estimates for the Consumer Price Index (IPCA) were also maintained at 3.6% for both this year and next. Finally, we expect the pension reform to be approved in the first round of voting at the Lower House floor in July, with a fiscal impact of about 60% of the original proposal. It is important to emphasize that the scenario is strictly dependent on these expectations regarding the pension reform.  



Global Economy
Global growth slowdown, Fed insurance cuts

• Trade war likely to weigh on global growth, central banks to respond.

• US: we see GDP slowing to 1.3% in 2020, Fed to implement insurance cuts (75 bps in 2019, starting in July).

• China economy to slow to 6.0% (prior: 6.2%) in 2019 and 5.5% (prior: 6.0%) in 2020.  

• Europe´s growth to remain sluggish, chance of ECB easing increasing.

• LatAm: Monetary policy easing to support growth in several countries.

• Lower metal prices.


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

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