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Latam Macro Monthly

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Domestic risks limit room for looser monetary policy in LatAm

April 12, 2019

Amid economic weakness, there is room for monetary flexibility in the region, but reform/policy risk is a constraint.


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

Global Economy
Global growth stabilizing, in a low interest rate environment
Activity in China is stabilizing and we expect improvement in the Eurozone by mid-year. The Fed remains on hold, amid new framework discussions. 

Brazil
Slower growth, interest rate cuts depend on reforms
We’ve trimmed our 2019 growth forecast to 1.3% (from 2.0%) due to weaker data and signs of deceleration at the margin. Conditional to the pension reform, we now forecast interest rate cuts to 5.75% this year and 5.5% in 2020. 

Argentina
Inflation in an unfavorable feedback loop with the dollar
The pass-through of a weaker currency leads to higher inflation. Higher inflation in turn boosts the dollar further up.

Mexico
Committed to fiscal responsibility, but execution is a risk
Updated estimates reinforce the commitment to fiscal responsibility, but achieving the budget targets will depend on the government’s ability to reduce expenditures. 

Chile
Postponing normalization
The central bank sees room to keep the monetary stimulus for longer, given the slower inflation convergence path and lower external risks. 

Peru
Social conflict in the Mining sector
A blockage affecting one the country’s biggest copper mines threatens economic activity and exports.

Colombia
Delaying fiscal consolidation
Easier deficit targets mean there is an increasing possibility of sovereign downgrades.


 

 


Domestic risks limit room for looser monetary policy in LatAm

Economic data in China is showing signs of stabilization, as trade concerns become less intense and the stimuli from the government start to be felt. With the recent weakness being reversed, we expect Chinese GDP to grow  6.2% in 2019 – a gradual slowdown relative to last year’s 6.6%. In Europe, weak external demand and heightened uncertainties are dampening industrial production, but we expect a pick-up in the next quarters due to stabilization in China and domestic fundamentals, such as a solid labor market, looser loans and moderate fiscal stimulus. The ECB might resume policy normalization next year if growth does improve, but at the moment it is watchful and preparing for further downside risks that could arise. Hence, it is unlikely to move anytime soon. On the other side of the Atlantic, the U.S. Fed also looks set to remain on hold this year. The question – to which the answer may depend on the new inflation-targeting framework discussion – is whether 2020’s final rate hike will materialize.

Combined with the economic sluggishness and tame inflation levels seen in most LatAm economies, this low-rates global environment creates room for looser monetary policy across the region. However, policy risks and uncertainty regarding reforms place constraints on how fast some central banks can adjust to this context.

In Brazil, we reduced our growth forecasts to 1.3% in 2019 and 2.5% in 2020 (from 2.0% and 2.7%, respectively), incorporating weaker data and signs of deceleration at the margin. The main sources of weakness are the virtually-stagnant industrial production and the lack of investments, which probably retreated again in the first quarter of the year – and we seem to be set for some additional cooldown in the near future, given the widespread drop seen in the most recent confidence surveys. Looking further ahead, the outlook remains completely dependent on economic reforms, in particular that of the pension system. Despite the noise seen in the first stages of the process, we expect the constitutional amendment sent to Congress to be approved in the third quarter of 2019. Conditional on this reform, and given the combination of weak activity and below-target inflation forecasts, we expect a new cycle of monetary easing. As a result, we revised our Selic rate forecasts to 5.75% at the end of 2019 and 5.5% at the end of 2020.


 

 


Global Economy
Global growth stabilizing, in a low interest rate environment

• US Fed on hold amid new framework discussion.

• China economic activity is stabilizing.

• Euro-area growth remains weak, but we expect an improvement by mid-year.

• LatAm: space for monetary flexibility amid economic weakness, but reform/policy risk is a constraint.

• China stabilization won’t help commodities prices much.

 

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



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