Rising uncertainty in a still-favorable global environment
The global economy continues to perform well, while business surveys indicate upside risks to growth. In the U.S., the odds are rising that Congress will pass a fiscal package that could give a small boost to growth. U.S. interest rates will likely adjust to this scenario.
Recovery across the region
The benign external environment is now fueling activity in LatAm more clearly.
Falling inflation paves the way for marginally lower interest rates
Well-behaved inflation and the latest central bank communications led us to reduce our estimate for the terminal Selic rate to 6.5% from 7.0%.
A stronger government faces challenging imbalances
The ruling coalition (Cambiemos) is well positioned for the mid-term elections. With enhanced electoral power and an increased representation in Congress, the government will push for reforms and other measures to reduce the fiscal deficit.
After the earthquakes
Growth surprised to the upside in 1H17, but recent earthquakes could be a (temporary) drag on GDP growth in 2H17, posing downside risk to our 2.3% growth forecast for 2017.
No further rate cuts
We revised our interest rate forecast to 2.5% by year-end (same as today), from 2.0%, as board members do not see the need for further easing, while activity starts to recover.
GDP gains traction amid fragile political situation
The good news is that GDP growth is gaining traction, but, for the first time in history, The Congress has ousted the whole ministerial cabinet. Increased confrontation between government and Congress compromises the implementation/approval of reforms.
Signs of recovery in activity
Activity is improving at the start of 3Q17, and higher real wages, lower interest rates and stronger global growth will help support the economy going forward. We expect 1.6% GDP growth this year and 2.5% in 2018.
Reality check for metal prices
Commodity prices increased in September, as the rise in agricultural and energy prices compensated for the drop in metal prices. We forecast iron ore prices at USD 60/mt and copper prices at USD 5,700/t by the end of the year.
Recovery across LatAm
Global economy activity continues to perform well, and business surveys indicate that there are upside risks to growth. In the U.S., the odds are rising that Congress will pass a fiscal package that could give a small boost to growth. U.S. interest rates will likely adjust to this scenario. Who will lead the Fed next year is still unknown, but the final choice will likely be neutral. In the euro zone, the political risks seem modest, while the cyclical recovery is firming up. In China, the slowdown is manageable and 19th Party Congress is unlikely to change this scenario. North Korea remains the main risk to the global outlook.
The benign external environment is now more clearly fueling activity in LatAm. In Brazil, growth is becoming widespread, in line with an acceleration towards the end of this year and into 2018. In Mexico, growth surprised to the upside in 1H17, but recent earthquakes could be a (temporary) drag in 2H17. In Chile and Colombia, activity is showing signs of improvement in 3Q17. Still, there is slack in the economy that is unlikely to disappear soon, so there is no imminent demand-side inflationary pressure, while currency appreciation is helping to bring tradable-price inflation down. Accordingly, the central banks of Brazil, Colombia and Peru will likely engage in further monetary easing in the near term. Conversely, we do not expect further rate cuts in Chile, and the central banks of Argentina and Mexico will likely wait before engaging in further easing.
In Brazil, the increase in extraordinary revenues and the economic rebound should allow the government to meet its fiscal targets in 2017 and 2018. We revised our forecast for the exchange rate to 3.25 reais per U.S. dollar by YE17 (from 3.35), given the recent behavior of foreign currency flow. Our call for YE18 remains at 3.50. We reduced our forecast for inflation to 3.0% from 3.2% in 2017 and to 3.8% from 4.0% in 2018. Well-behaved inflation and the latest Central Bank communications led us to reduce our estimate for the terminal Selic rate to 6.5% from 7.0%. We lifted our forecast for GDP growth in 2018 to 3.0% from 2.7%, due to even-lower interest rates. Our estimate for 2017 remains at 0.8%.