Itaú BBA - Shifting global risks

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Shifting global risks

September 4, 2020

The global recovery continues, while U.S. election risk is on the rise. In Brazil, the high uncertainty on the fiscal outlook remains.

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


Global Economy
Global recovery continues in 2H20, while U.S. election risk is on the rise
We expect the global recovery to continue, with lower COVID-19 mortality rates, vaccines on the horizon and continued fiscal and monetary support, including the Fed’s new framework. However, uncertainty on the U.S. election lingers on, and signs that the race could be more competitive would create more volatility, possibly endangering the recovery.

Brazil
Waiting for a fiscal solution

There are signs of improvement on the COVID-19 outbreak, with fewer new deaths, while advances in testing for vaccines may also help the economy to recover. We maintained our GDP growth forecasts at -4.5% in 2020 and 3.5% in 2021. However, the high uncertainty on the fiscal outlook remains. We revised our primary deficit estimate for this year to 11.7% of GDP, from 11.0%, due to the extension of emergency aid. We also changed our inflation forecast for 2020, from 1.7% to 2.0%, incorporating an expected increase of food prices.

Latin America
Our Forecasts 

 



Shifting global risks

Global coronavirus contagion remains high, somewhat plateauing, but the mortality rate seems to have declined, in a combination that should be enough to allow the reopening to continue, adding to massive stimuli and a favorable inventory cycle as a driver of the economic rebound. Nevertheless, this comeback will be partial at best, as long as some hard-hit sectors, such as services, do not join in – and that in turn is something unlikely to happen while virus-related concerns persist. Therefore, only vaccines, which are expected to be ready in 4Q20, will be the true enablers of a broader recovery. In this sense, pandemic-related risks are shifting from short-term impacts to the sector-crippling possibility of an eventual vaccine delay.

Once the top pick for 2020 global risks, U.S. elections now resurface as a potential driver of volatility, since November approaches and the acute sanitary crisis fades. Joe Biden remains ahead in the polls, but Trump’s approval may climb as the virus retreats and social unrest wanes – with a closer race meaning higher risks of a contested election and possible delay in new fiscal stimulus. With this backdrop, we see shifting risks around our baseline scenario, which for now remained broadly unchanged for the main economies around the globe.

Latin America shares most of the outlook described above, lagging behind most of the world in terms of epidemic curves, but nonetheless seeing improvements in the number of new cases and/or new deaths that are allowing relaxation of social distancing measures in many countries. Although national account figures show a collapse in the second quarter, monthly data indicate sequential gains after the slump. Besides the speed of reopening, activity has also been driven by the degree of stimulus. As a matter of fact, in Brazil, where the reopening is advanced (despite still-high contagion) and stimuli are strong (despite high public debt levels), the contraction was likely one of the mildest among the countries within our coverage. Argentina (with strict lockdowns and a low capacity to implement stimulus), Peru (with strong stimulus, but strict lockdowns) and Mexico (with softer social distancing measures, but shy stimuli) recorded the strongest contractions. Local assets benefit from the improved global mood, higher commodity prices and a weaker USD, but exchange rate appreciation will be limited by still-intense outbreaks and lingering domestic uncertainties.

Such uncertainties, in Brazil, arise from the discussion about public expenditure, with a tendency to increase social programs that results in concerns about the sustainability of the current framework. In this context, we now expect a primary deficit of 11.7% of GDP in 2020 due to the extension of emergency aid, but we continue to forecast a 2.5% deficit in 2021, assuming the rise in social spending is partially offset by tax increases. We kept our projections for the exchange rate unchanged, at 5.25 BRL per USD this year and 4.50 in 2021, and for the Selic rate, at 2.0% and 3.0% per year, respectively – but we emphasize that both the expected appreciation for 2021 and the monetary policy stance will depend on the fiscal outlook. On the economic activity front, after the release of the Q2 GDP (with a less intense contraction than the market consensus came to expect in earlier months of the crisis), we continue to forecast GDP to fall 4.5% this year and grow 3.5% in 2021. Finally, with regards to inflation, we adjusted our IPCA projection in 2020 to 2.0%, from 1.7%, incorporating higher pressure in food prices. For 2021, we continue to expect 2.8% inflation, with a downward bias, given the degree of slack in the labor market.

 



Global Economy
Global recovery continues in 2H20, while U.S. election risk is on the rise

 We expect the global recovery to continue in 2H20, with a decline in the COVID-19 mortality rate, vaccines on the horizon, continued fiscal and monetary support, and a positive inventory cycle in 2H20.

 The change in the Fed’s framework will allow for ample monetary support for longer.

 With the approach of the U.S. election, signs of a competitive race could create some risks for the
recovery.

 Latin America: reopening advances and central banks become more conservative.
 

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



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