Itaú BBA - Slower, with more risks

Latam Macro Monthly

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Slower, with more risks

May 11, 2020

Given our new growth outlook for the U.S., Eurozone and LatAm, we revised our global GDP forecast to -3.2% in 2020.


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

 

Global Economy
As economies reopen, downside risks remain
The first wave of the coronavirus contagion was deeper and longer-lasting in Europe and the U.S. than in China, but has finally peaked and receded in both regions, allowing them to cautiously start reopening their economies. We revised downward our GDP growth forecast in the U.S. (to -3.3%, from -1.5%), Europe (to -8.0%, from -3.2%) and China (to 2.0%, from 2.5%), but the risks are still on the negative side. 

Brazil
Weaker economy amid even tougher fiscal challenges
We changed our primary deficit estimates to 10.2% of GDP from 8.0% for 2020, due to the stronger-than-expected impact on public accounts of the measures implemented to address the COVID-19 crisis, and reduced our GDP growth forecasts to -4.5% from -2.5% for 2020, incorporating the declining global growth forecasts, the persistent spread of COVID-19 and rising fiscal uncertainties, which impact financial conditions. We now see the Selic benchmark rate at 2.25% p.a. by year-end (2.50% p.a. previously), incorporating the recent widening of the output gap, but we reckon the environment warrants caution.

LatAm
Our forecasts


 


Slower, with more risks 

The wave of COVID-19 infection was deeper and longer-lasting in Europe and the U.S. than in China, but it has finally peaked and receded in both regions, allowing them to start reopening their economies – some flexibilization measures are already in place and others are set to follow during (and possibly beyond) the month of May. The protracted period of acute crisis led us to revise downward our 2020 growth forecasts. We now expect global GDP to fall 3.2% this year (instead of -1.1%, as previously forecast), mainly driven by lower growth in the U.S. (-3.3%, from -1.5%) and in Europe (-8.0%, from -3.2%). Nonetheless, we believe that economic activity in both regions has bottomed-out in April and will gradually, however unevenly, normalize from now on.

Global risks still remain tilted to the downside. First, there are chances of a second contagion wave. So far, activity in China is normalizing without triggering a new outbreak, but at this stage the possibility of recurrence cannot be ruled out at a global scale. Second, economic damage (for example, credit defaults) might be deeper, and harder to heal, than anticipated. Finally, fiscal/political risks could increase, hampering the recovery.

In Latin America, economic authorities are responding to the shock as well as they can. Monetary policy is adjusting faster in countries with better fundamentals – Chile and Peru have already moved to their effective lower bounds – but rates are falling across the board. At the same time, fiscal metrics are deteriorating as governments act to preserve jobs and firms, but also due to revenue losses. Any failure to support the economy now could prove fiscally costly in the years to come, as jobs are lost and firms go bankrupt – but in countries like Brazil it is paramount that any extra spending is seen as a temporary measure, rather than a reversal to previous unsustainable practices. Despite the macroeconomic stimulus, contraction in the first half of the year will likely be deeper than we were previously expecting and the recovery is set to be more gradual, as the outbreak leave scars on the labor market and private and public sector balance sheets. We now expect GDP in LatAm to fall by 6.1% this year (from the previous -3.5%). 

In Brazil, we now see a 4.5% contraction in 2020 (previously, -2.5%), due to the continued spread of the virus. For 2021, we expect 3.5% growth (from 4.7%), not only due to lower statistical carryover, but also because of less-favorable financial conditions that stem growing fiscal concerns. The crisis creates pressure for higher spending (10.2% deficit this year), something understandable at this juncture, but that may very well damage future adjustment if stimulus measures start to have a more permanent character. As a matter of fact, we now forecast a wider primary deficit in 2021, driven by higher social spending. Deteriorating fiscal dynamics increase country risk and reduce the room for a BRL appreciation. Added to lower interest rates and a sharper economic contraction, this results in weaker forecasts for the exchange rate, now at BRL 5.75/USD at the end of this year and BRL 4.50/USD in the next (previously, 4.60 and 4.15). Finally, although this environment warrants caution, we believe that the recent widening of the output gap will allow an additional interest rate cut. We see the Selic benchmark rate at 2.25% p.a. by year-end (2.50% p.a. previously).


 


Global Economy 
As economies reopen, downside risks remain 

• The first wave of the coronavirus contagion was deeper and longer-lasting in Europe and the U.S. than in China, but has finally peaked and receded in both regions, allowing them to cautiously start reopening their economies.

• We revised our 2020 GDP forecasts to -3.3% in the U.S. (from the previous -1.5%), and to -8.0% in the Euro Area (from -3.2%). We believe that economic activity in both regions has bottomed in April and will gradually, albeit unevenly, normalize from now on.

• We also revised our China GDP forecasts to 2.0% in 2020 (from 2.5%) and to 7.5% (from 8.0%) in 2021, as uncertainties remain around growth target.

• Risk remains to the downside. First, there is a chance of a second wave of contagion. Second, economic damage (for example, credit defaults) might be deeper than anticipated. Finally, fiscal/political risks could increase, hampering the recovery. Europe now seems more exposed to several of these risks. 

• In Latin America, sharper activity deterioration reduces inflationary pressures in most countries.


 

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



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