Global scenario still calls for caution
Gradual rate hikes in the U.S. seem warranted, barring a major negative event. Globally, trade tensions remain a leading source of pressure, while, in the euro area, Italy’s fiscal outlook becomes the main risk.
Solving idiosyncratic risks?
A new agreement between the IMF and Argentina and the successful renegotiation of NAFTA suggest that idiosyncratic risks in the region are dissipating. Brazilian elections take the center stage now.
Waiting for economic reforms
On the brink of the elections, uncertainty surrounding reforms continues to pressure markets and limit economic growth.
A new agreement with the IMF
The adjustments are expected to result in a more balanced economy, but there are risks: high economic costs and their possible effects on next year’s electoral trends can affect markets’ confidence in the government’s strategy.
NAFTA agreement reached
The agreement eliminates a major source of uncertainty over Mexico’s economy and asset prices. We expect the economy to accelerate next year to 2.2%, from 2.0% this year.
Preparing for liftoff
Despite low inflation and risks for global trade, the central bank has adopted the view that the time is right to start removing monetary stimulus. We expect a gradual cycle (one hike per quarter), taking the policy rate to 3.75% by the end of 2019.
Continuing political risks
In a temporary victory for President Vizcarra, the opposition-led congress granted his cabinet a vote of confidence.
With IMF’s flexible credit line potentially ending in 2020, the central bank of Colombia has opted to gradually accumulate reserves through the sale of USD put options.
After some relief in Argentina and Mexico, Brazil takes center stage in LatAm
Strong growth momentum in the U.S. continues and the Fed is set to keep hiking rates toward a slightly restrictive stance, unless a major negative event takes place – and the mid-term elections are not likely to change that. Economic activity remains softer in the rest of the world, but we expect a slight rebound. Europe is still supported by strong fundamentals and China is likely to stabilize as a result of the recent policy easing, while Japan tends to keep growing above potential for a while, boosted by BoJ’s policy stimulus and reduced political risks. Nonetheless, the international economic outlook still calls for caution. Monetary policy normalization in advanced economies and U.S.-China tariff war continue to be major sources of risk in the global landscape, while in the euro area Italy’s fiscal policy is an additional concern.
In Latin America, idiosyncratic risks seem to be dissipating. In Mexico, the successful renegotiation of NAFTA reduces economic uncertainty and will likely lead to better growth ahead. In Argentina, a new agreement with the IMF brings some relief in the short term, but the path ahead will not be easy, as the financial package – which will ensure financing in a challenging year (there are presidential elections in 2019) – comes with the commitment of sharp fiscal and monetary policy tightening. Now, all eyes are turned to Brazil.
On the brink of the elections, uncertainty surrounding reforms, especially regarding fiscal policy, continues to pressure markets and limit the pace of economic recovery in Brazil: activity indicators in 3Q18 show weak underlying growth, in line with our 1.3% GDP growth forecast for 2018. We continue to expect 2.0% GDP growth in 2019, but a possible frustration regarding the outlook for reforms – and the resulting deterioration of financial conditions – constitutes a major downside risk. In this highly uncertain context, the BCB has not committed to any move in October, but its recent communication has paved the way for a hike, in case it proves necessary.
Global scenario still calls for caution
• Activity momentum remains stronger in the U.S. than in the rest of the world.
• U.S. mid-term elections are unlikely to change the likelihood of a gradual increase in interest rates.
• Italy is a major risk for the euro area.
• Japan growth to stabilize above potential.
• China shows signs of policy-induced improvement in domestic demand, just enough to offset weaker external demand due to trade frictions with U.S.
• We now forecast higher oil prices.