Itaú BBA - New risks in the new year

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New risks in the new year

December 13, 2019

Old risks (tariffs, Brexit) are fading, but others arise.


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

 

Global Economy
Growth likely to strengthen
Fading risks (tariffs, Brexit) and stimulus to drive a slight improvement in global growth in 2020.

Brazil
A gradual, but healthy, recovery
We improved our GDP growth forecasts for this year to 1.2% from 1.0%. For 2020, we still expect growth at 2.2%, accelerating to 3.0% in 2021.

Argentina
The new government begins
Argentina’s elected President Alberto Fernández took office and bet on an unorthodox economic team to deal with debt restructuring and make the economy grow again. We forecast a GDP contraction of 2% in 2020, following a 2.9% contraction in 2019.

Mexico
USMCA approval closer
Negotiators from U.S., Mexico and Canada reached an agreement on USMCA changes. Democrat representatives hinted that the USMCA could be voted in U.S. Congress as soon as next week.

Chile
Resetting expectations
Besides embarking on an ambitious social reform agenda, politicians have agreed to hold a plebiscite to decide on a new constitution. High uncertainty will likely keep growth low next year (we expect 1.2%).

Peru
Still waiting for the Constitutional Court
The Constitutional Court has yet to rule on the dissolution of Congress. In any case, legislative elections continue scheduled for January.

Colombia
Protests put more pressure on fiscal accounts
Joining the regional wave of demonstrations, Colombians took to the streets in November to voice their discontent about a variety of issues. Risks for fiscal accounts are increasing as the government responds to social unrest with policy easing.


 


New risks in the new year

The main risks that plagued the global economy in 2018 and 2019, namely those related to U.S.- China tariff escalation and Brexit, are stabilizing. For 2020, the main risks stem from the U.S. election, as economic policy proposals seems more polarized than ever. Other risks include lingering U.S.- China tensions. On the other hand, central banks have also cut interest rates significantly and in a synchronized manner in 2019, which tends to impact economic activity positively in 2020. 

All told, we expect global manufacturing and trade flows to stabilize in 2020, while global GDP is set to improve slightly to 3.1%, led mostly by emerging markets ex-China. The U.S. will likely grow at close to 2.0% and the Fed should remain on hold in 2020.  Meanwhile, euro zone´s growth is set to stabilize at close to its potential pace of 1% in 2020. In China, recent data shows signs of stabilizing growth. For now, we maintain our growth forecast at 5.7% in 2020 and 5.6% in 2021 for China, but the possibility of a trade deal with the U.S. implies an upward bias to our numbers.

In Latin America, a partial dissipation of domestic risks is supporting regional asset prices for now. In Chile, demonstrations have lost momentum since the government announced a referendum to decide on a new constitution. In Colombia, protests have been peaceful and a dialogue is underway, causing the Colombian peso to recover a significant portion of its recent losses against the U.S. dollar. In Brazil, advances in the fiscal agenda have allowed record low interest rates, countering the effects of a tighter fiscal stance and producing a gradual improvement of activity. That said, market volatility in the region may return in 2020, as the process of writing a new Constitution in Chile will ensure uncertainty remains high, Colombian fundamentals are relatively fragile, the political situation in Peru remains unstable, and Mexico´s weak growth and rising violence does not bode well for fiscal prospects. 

In Brazil, we increased our GDP growth forecast for this year to 1.2%. For 2020, we kept our expectation at 2.2% and see growth accelerating to 3.0% by 2021. The beef price shock will put pressure on inflation in 2019, but has a deflationary impact in 2020. As a result, we revised our inflation forecast to 4.1% in 2019 and 3.5% in 2020. We project 3.5% inflation in 2021 as well. Regarding monetary policy, we kept our Selic forecast at 4.0% at the end of 2020.


 


Global Economy
Growth likely to strengthen

• Fading risks (tariffs, Brexit) and stimulus to drive a slight improvement in global growth in 2020.

• U.S. will likely grow at some 2.0% and the Fed should remain on hold in 2020.

• Europe to stabilize at close to potential.

• China: signs of better growth.

• Main global risks for 2020: U.S. election, replacing trade/Brexit.

• LatAm: partial dissipation of domestic risks supports regional asset prices.


 

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



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