A benign global environment continues to benefit emerging markets.
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Busy agenda ahead won’t derail global recovery
Attention turns to fiscal deadlines in the U.S. and the Fed’s announcement of balance sheet reduction, but we don’t see these events derailing the global recovery.
Benign external environment leaves room for further monetary easing
Economic slack and well-behaved exchange rates mean there is still room for further monetary easing in most countries.
Signs of a rebound amid fiscal deterioration
Economic activity data are improving, and we revised our 2017 GDP growth forecast upwards. The unsustainable public debt dynamics continues to be the economy’s main vulnerability.
Renewed political momentum
Argentina’s ruling coalition (Cambiemos) obtained a better-than-expected result in the primaries for the mid-term elections (due in October), increasing the likelihood of reforms and fiscal adjustment.
Fundamentals improve, but politics pose risks
The shocks battering the economy (uncertainty over trade relations, inflation spike and falling oil output) seem to be moderating, which, coupled with a solid U.S. economy, will likely sustain growth during the second half of the year.
Sluggish growth persists
Activity in the first half of the year confirmed a lethargic Chilean economy. We now expect growth of 1.3% for this year (1.6% previously).
The central bank’s Chairman, Julio Velarde, warned that August’s inflation would be pressured by a supply shock, which he dubbed the “lemonade effect,” that is, a combination of sharp rises in regulated water tariffs and lemon prices.
A pause in the cycle
The central bank is likely nearing a pause in its easing cycle, given inflation is set to accelerate towards year-end due to a lower base of comparison. Nevertheless, inflationary pressures will fade ahead, so additional rate cuts are likely next year.
Metals rally unlikely to last
In our view, the metal rally will fade as the Chinese economy decelerates in 2H17. We forecast iron ore prices at USD 60/mt and copper prices at USD 5700/t by the end of the year.
Weak activity and stable currencies leave room for further monetary easing in Latam
A benign global environment continues to benefit emerging markets. In the U.S., activity remains solid as attention turns to fiscal deadlines (government shutdown, debt ceiling) and the Fed’s announcement of balance sheet reduction in September. In the euro area, Germany’s elections are a non-event, activity is healthy, the exchange rate is not yet appreciated and the ECB is on track to announce, in October, a cautious reduction of its asset purchases for 2018. In China, we expect a gradual economic slowdown. The 19th Party Congress in October is unlikely to trigger either a sharp change in policy or a steep economic slowdown.
In Latam, well-behaved exchange rates and economic slack mean there is still room for further monetary easing in most countries in the region. In Brazil, we expect another 100-bp rate cut at the BCB’s September meeting. In Chile, we expect the policy rate at 2% by year-end, from the current level of 2.5%. Colombia’s central bank has indicated a pause in the easing cycle, but we expect further cuts in 2018 as inflationary pressures fade. In Peru, we continue expecting the BCRP to deliver two more 25-bp rate cuts in 2017, taking the reference rate to 3.25%.
In Brazil, the government decided to increase its fiscal deficit targets, so the public debt dynamics becomes even more unfavorable. Economic activity data, on the other hand, are improving, and we revised our 2017 GDP growth forecast upwards to 0.8% (from 0.3%). For 2018, we continue to expect 2.7% growth. We also reduced our average unemployment rate forecast in 2018 to 12.4% from 13.3%. Inflation remains low, reflecting substantial slack in the job market, a well-behaved currency, and the drop in food prices. We reduced our IPCA inflation forecast to 3.2% this year (from 3.4%) and maintained 4.0% for 2018.