Macroeconomic picture - September 2020

• Fed:  As widely expected, the last FOMC failed to deliver policy changes, while reaffrming quite a dovish stance of the Fed. In his Jackson Hole speech, Powell explained the changes undertaken as part of the Fed’s strategy review and announced the adoption of a flexible form of average inflation targeting. The Fed has formalized a new reaction function and a more dovish path compared with previous recoveries, with the FOMC aiming to push unemployment as low as possible, at least until inflation pressures are reflected in the data. More monetary stimulus could come as soon as the September FOMC with stronger Forward Guidance and QE.
• ECB: The ECB refrained from announcing additional stimulus at the July meeting, given the strong packages already put in place and pending the outcome of the summit on the recovery fund, ultimately leading to quite a supportive deal for the entire Eurozone. Communication confirmed the ECB’s dovish stance. The main message was reassuring, underscoring the need to tap into the full arsenal of PEPP firepower. In response to some hawkish members who had previously raised the possibility of only partially using the recently expanded QE programme, President Lagarde stated quite clearly: “Our baseline remains that we will use the entire envelope of the PEPP”.
• BoJ: The central bank’s latest economic outlook re-confirmed guidance of keeping rates low for longer and basically ruled out policy normalization in 2021. While we expect loose monetary policy to continue, we are not expecting the central bank to cut rates further in light of the concerns voiced by offcials on the cost of negative rates. The policy combination of fiscal spending and asset purchases with YCC will continue. Forward guidance and special credit programs are likely to be strengthened if the second wave outbreak starts to weigh on the economy.
• BoE: At its last meeting, the BoE did not deliver new policy measures: there was a unanimous vote to keep rates on hold at 0.1% and to maintain its previous asset purchase target at GBL 745 billion. Reiterating previous guidance that the remaining purchases would be completed by the turn of the year, the CB confirmed quite a pronounced tapering in its purchases. Despite negative rates being mentioned as a possible tool at its disposal, the CB underlined the risks and shortcomings associated with this option, so we do not expect the MPC to move to NIRP.

• China: The economic recovery continued upon entering Q3, albeit at a slower pace sequentially. Momentum was uneven across sectors. The state-led stimulus boosted land sales, construction and related equipment sales, while manufacturing capex and private consumption lagged behind. Looking ahead, we expect growth to continue to normalize down in sequential terms, but the equivalent headline YoY growth will move higher. We expect headline CPI to resume its downtrend throughout the rest of the year. A meaningful pick-up in inflation is not expected until 2021.
• Indonesia: The easing in the lockdown has brought partial relief, as the pandemic continues to spread. MoF and BI have embarked in a burden-sharing scheme, with BI acting as a backstop for funding a very high deficit. In the past two months, monetary policy has been prudent with only 25bps of easing, notwithstanding very subdued inflation (1.5% YoY), a narrow CAD and a huge output gap. The 2021 budget announced in mid-August, has slightly widened the FD expected next year from 5.2% to 5.5% out of GDP. As of today, the revenue shortage is being offset by a very timid fiscal disbursement.
• Brazil: The economy is recovering robustly, except in services, thanks to whatever it takes policy response of a both monetary and fiscal nature – the latter totalled 9% of GDP – and normalising mobility thanks to better Covid dynamics. In fact, GDP is expected to shrink by about 5% and ‘only’ half of Mexico’s near double-digit contraction. The administration has some contrasting choices to make in the near future such as spending cap compliant 2021 budget that would, however, weigh on growth and fiscal consolidation itself. There might be another option – trade a temporary breach of the cap in exchange for fiscal reform that would both support the recoveryand improve the medium-term fiscal story.
• Turkey: In addition to the Covid-related economic slowdown, Turkey has been facing growing headwinds due to widening imbalances and rising geopolitical tensions. The credit-fuelled growth model has been accompanied by a widening current account deficit, capital outflows and a continued decline in international reserves, the latter having reached precarious levels. Given the lack of credible tightening on behalf of the CBRT, the TRY has depreciated by almost 20% year to date -- among the worst performers in EMs. On August 20th, the CBRT decided to hold the policy rate at 8.25% (headline CPI is running at above 10%), a decision which does not augur well for the TRY and Turkish assets.

The uncertainty around the macro forecasts is very high, and it triggers frequent reassessments any time fresh high frequency data are available. Our macroeconomic forecasts at this point include a higher qualitative component, reducing the statistical accuracy and increasing the uncertainty through wider ranges around them.

A global recession is our base case today

1. How deep?

• The deepness depends on the virus longevity in the countries affected and the consequent gradual to complete lockdown in most of them. Downturn is evident in domestic demand (across its components at different degree) and in trade dynamics. We assume the largest downturn in the lockdown quarter and a milder downturn to follow. We monitor outbreak developments and lockdown/resumption of the economic activity.

2. How long?

• The timeline depends on the deepness of the economic disruption together with the credit conditions and the rise of corporate default, magnifying the financial markets turbulence and therefore the impact on the economy.
• The timeline of the shock has extended, and overall a peak is expected by May to June 2020. The global economy was showing signs of growth stabilization during the 4Q2020.
• The timeline is also a function of the specific developments of the outbreak together with pre-existent fragilities.

3. The fiscal impact

• The impacts of micro and macro fiscal measures are not included in our forecasts but it’s fair to assume a normalization in the financial and liquidity conditions driven by Monetary Policy authorities

Financial targets

• Financial targets are reviewed on the same line and include policy actions implemented on a daily basis.