Itaú BBA - Signs of progress, amidst short-run challenges

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Signs of progress, amidst short-run challenges

November 13, 2020

Progress in vaccine development worldwide is a positive sign, but short-term challenges remain.

For the version with all charts and tables, please open the attached pdf file

Global Economy
Vaccines and constrained Bidenomics: short-term challenges, but medium-term relief

Although Europe and the U.S. are facing short-term challenges with renewed waves of coronavirus, vaccine development is in progress and the pandemic crisis will likely end in 2021. In the U.S., we revised our GDP forecasts to -3.5% for 2020 (from -4.0%), after strong growth in the third quarter. In Europe, we now estimate a GDP drop of 7.4% in 2020 (from -7.0%), due to the re-imposed lockdown measures.

Brazil
Recovery is underway, but fiscal outlook and coronavirus remain a risk

There are signs of deceleration in the spread of the virus, and risks of a second wave seem contained, for now. We revised our GDP estimate to -4.1% (from -4.5%) for this year and 4.0% in 2021 (from 3.5%). The fiscal risk, however, remains high. With lack of political consensus, uncertainties regarding sources for funding social spending increases may lead to the flexibilization of the fiscal regime.

Latin America
Our Forecasts

 


Signs of progress, amidst short-run challenges
 

As the worldwide effort for the development of a vaccine against the coronavirus continues, a successful drug seems to be close at hand, which could lead to an end of the pandemic crisis in 2021. The Pfizer/BioNTech announced their vaccine candidate was found to be more than 90% effective in preventing infections of Covid-19, while other competitors are also likely to report results soon. However, short-run challenges remain, as renewed waves of the disease continue to rattle the developed world. In Europe, cases are beginning to moderate, but not before several national lockdowns were reimposed. In the U.S., both new cases and, more recently, new deaths continue with an upward trend, with increased risks of further mobility restrictions.

Incorporating the recent lockdown wave in the European continent, we revised our GDP forecasts for the region down to -7.4% for this year (from -7.0% previously) and to 5.0% (from 6.0%) in 2021. In the U.S., despite the evolution of the disease, the strong growth in the third quarter (which continues in the current quarter, as indicated by our daily activity tracker) led us to change our GDP estimate for this year to -3.5% (from -4.0%). For 2021, we kept our forecast at +4.0%, as even a small policy stimulus – the most likely scenario, as a newly-elected Joe Biden will meet a divided Congress –, combined with widespread deployment of the vaccine, means a solid growth for next year. Finally, in China, we now estimate 2.1% GDP growth in 2020 (from 2.3%), following a tad lower-than-expected growth in the third quarter. However, the country’s recovery remains on track, driven by further opening of the economy and job market normalization. Therefore, we continue to see growth picking up to 7.5% in 2021. 

In Latin America,  economic reopening continues, as contagion falls in most countries. Recent news on vaccines and the outcome of presidential elections in the United States have also created a more favorable environment for emerging markets, benefiting LatAm currencies. Solid current account positions also suggest room for exchange rate appreciation in countries like Brazil, Mexico and Chile. However, domestic uncertainties (fiscal or political) will likely continue as an offsetting factor, curbing further currency strengthening.

In Brazil, risks of a second wave of coronavirus also seem contained in the short term. We now estimate a 4.1% GDP drop this year (from -4.5%), after more recent data confirmed our expectations of a solid recovery in the third quarter, especially in the goods sector. We also increased our GDP forecast for 2021, now at 4.0% (from 3.5%). We expect the still-depressed services sector to gain steam as the pandemic decelerates and social isolation measures are lifted, offsetting the expected drop in the consumption of goods after the emergency aid is partially withdrawn. However, fiscal uncertainty remains high – we continue to approach year-end without any concrete solution to the budgetary dilemma. Doubts regarding the compliance with the spending ceiling are set to persist until March 2021 at least, when we expect the annual budget to be approved. After that, Congress should debate permanent sources of funding for an increase in social spending, ideally involving compensations such as administrative expenditure cuts. However, we understand that lack of political consensus to approve such measures is a meaningful risk, which could lead to a more flexible fiscal regime.



Global Economy
Vaccines and constrained Bidenomics: short-term challenges, but medium-term relief

 

Although Europe and the U.S. are facing renewed waves of COVID-19, vaccine development is in progress and the pandemic crisis will likely end in 2021.
 

U.S.: the recovery continues in 4Q20. Senate-constrained Bidenomics will mean a modest fiscal stimulus, lower regulation risks and less scope for radical policies. ​​​​ 
 

European GDP will likely contract 3.2% in 4Q20, due to renewed lockdowns, but we expect growth to resume in 2021 (5.0%).

China: the recovery remains on track.

Latin America: brighter external scenario meets domestic challenges.


For the version with all charts and tables, please open the attached pdf file



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