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Global recession fears trigger economic policy reactions

January 11, 2019

The Fed is set to hike rates just once in 2019 to ensure balanced risks


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

Global Economy
Policy responses in the U.S. and China set to limit global recession risks
The Fed is set to hike rates just once in 2019 to ensure balanced risks, while China will likely ease monetary and fiscal stances to stabilize growth at around 6.0%-6.5%.

 

LatAm
Fed to the rescue?
Latin American asset prices improved in the first days of the year, after the Fed’s dovish turn.

Brazil
Gradual rebound in economic activity as fiscal expectations improve
We forecast a shrinking primary deficit, from 1.7% of GDP in 2018 to 1.3% in 2019 and 0.8% in 2020. At the same time, we expect 2.5% GDP growth for 2019 and 3.0% for 2020.

Argentina
Riding the wave of uncertainty
Uncertainty regarding the electoral outcome may harm the economy and jeopardize president Macri’s reelection chances.

Mexico
Responsible fiscal budget, but execution is a risk
AMLO is committed to fiscal responsibility, but implementation of the fiscal targets is challenging, given his social and economic programs and may become a drag on economic activity.

Chile
Gradual hiking cycle to continue
With apparently strong activity at the close of 2018, the central bank will likely feel comfortable to continue with its normalization cycle later this month.

Peru
Growth improvement, despite external volatility
We forecast 4.0% GDP growth in 2019 (from 3.8% expected for 2018), assuming that trade tensions dissipate and that monetary policy remains expansionary, offsetting the lower fiscal impulse.

Colombia
Stable rates set to continue
The central bank will likely maintain stable rates for now, as international uncertainty persists and activity shows mild signs of recovery. We continue to expect two hikes later in 2019, once the upswing becomes clearer.


 


Global recession fears trigger economic policy reactions 

Trade concerns, tighter financial conditions in the U.S., softer activity readings in China and political uncertainties in Europe set a fertile terrain for worries about global recession risks. As a reaction to these concerns, policymakers are adjusting their rhetoric and actions. To ensure balanced risks, the Fed now seems set to hike rates just once in 2019. At the same time, China will likely ease monetary and fiscal stances to stabilize growth. Under the threat of a downturn and already feeling the first effects of the trade war, both countries have recently become more amicable and will likely avert further tariff hikes as well.

In Latin America, the first days of the year brought improvements for asset prices, which were fueled by dovish rhetoric from the Fed and progress in the trade talks between the two clashing giants. Despite the global slowdown (not recession), we expect higher growth in the region during 2019 for a variety of country-specific factors. However, the external scenario naturally means that risks around here are tilted to the downside. The biggest economies of the region are in for an interesting year: in Argentina, uncertainty regarding the electoral outcome may rock markets and harm the economy (together with Macri’s reelection chances). At the same time, all eyes in Mexico and Brazil rest on the next steps of the newly-elect incumbents. In the former, anti-establishment AMLO has committed not to deteriorate the government’s finances. In the latter, Bolsonaro has vowed to restore them.

As a part of the adjustment effort in Brazil, we expect a pension reform to be approved in 2019. We forecast a shrinking primary budget deficit, from 1.7% of GDP in 2018 to 1.3% in 2019 and 0.8% in 2020. Following this baseline assumption, we expect that improving financial conditions will drive GDP growth upward to 2.5% in 2019 and 3.0% for 2020. With a narrow interest rate differential (internal vs. external) and a volatile international backdrop, we stick to our forecasts for the BRL, at 3.90 BRL/USD for year-end 2019 and 2020. Inflation remains well-behaved and, in the absence of persistent deviations from its targeted path, the BCB seems set to keep the Selic rate dormant at 6.5% for quite a  while.


 


Global Economy
Policy responses in the U.S. and China set to limit global recession risks

Fed to hike just once in 2019 to ensure balanced risks. For now the balance sheet rundown seems likely to continue.

China set to ease monetary and fiscal stances to stabilize growth at around 6.0%-6.5%.

U.S.-China trade deal will likely avert further tariff hikes.

Europe, however, has little policy room if global or domestic risks materialize.

Oil prices to stay in the range of USD 50-60.


 


LatAm
Fed to the rescue? 

Latin American asset prices improved in the first days of the year, after the dovish rhetoric from the Fed (which is responding to tighter financial conditions). Progress in trade talks between China and the U.S. is also fueling the price action. 

Amid concerns of a slowdown in global growth, activity in some of the region’s economies (Chile, Colombia and Peru) likely improved in 4Q18. 

We expect higher growth in the region during 2019, for a variety of country-specific factors, but the external scenario means that risks are tilted to the downside. 

The recent guidance provided by the Fed, together with still-fragile activity, makes room for those central banks that face well-behaved inflation to wait before removing monetary stimulus. In Mexico, additional rate hikes should not be taken for granted, while in Argentina uncertainty over the political scenario combined with a commitment not to increase the monetary base target could pressure interest rates upward during 2019.


 

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



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