Macroeconomic picture - July 2020

• Fed: The FOMC made just one policy change, by committing to maintain at least the current pace of asset purchases over coming months at $80bn in US Treasuries and $40bn in MBS per month. But it gave investors greater certainty that policy will remain on hold for a long time (through the economic projections, the dots and the reaction function). The Fed will wait to have more clarity on the path of the recovery before fine-tuning other monetary policy tools (strengthening in forward guidance, calibration of asset purchases with more clarity regarding its goal, and possibly introducing a front-end yield curve control). The median of members’ projections sees near-zero federal funds rate at least through the end of 2022.

• ECB: The ECB has delivered a stronger than expected combination of measures:
  • PEPP increased in size: the envelope will be increased by €600 billion to a total of €1,350 billion;
  • Extended horizon of net purchases: the horizon for net purchases under the PEPP will be extended to at least the end of June 2021;
  • Long horizon fixed for reinvestments: the maturing principal payments from securities purchased under the PEPP will be reinvested until at least the end of 2022.
• BoJ: Following up on the government’s plan to expand the no-interest/unsecured lending program, the BoJ increased its special lending program from ¥75tn to ¥110tn in mid-Jun, in addition to JGB purchases and ETF purchases at ¥12tn per year. The June meeting statement downplayed the inflation target, reducing the likelihood of further easing. Governor Kuroda also hinted the central bank will not raise interest rates in FY2021-22 before the Fed. He reiterated that the stability of the yield curve at low levels is important.

• BoE: At its last meeting, the BoE left rates unchanged and expanded its asset purchases by £100bn, broadly in line with the consensus of expectations. In signalling that, thanks to the latest extension, QE would see purchases run until year-end, the BoE is pointing to a slower pace of weekly asset purchases relative to the current one. Negative rates were not part of the discussion, confirming that for the time being QE remains the privileged tool of monetary policy.

• China: Economy continued to grow above trend sequentially in May, led by public investments and a steady pick-up of consumption. Q2 growth is tracking at 2-3%yoy, with seasonally-adjusted sequential growth close to 10%qoq, reversing the fall of 9.8% in Q1. We expect sequential growth to normalize down in H2. Year-over-year growth will print at 5-6% during the same period. Inflation has dropped faster than expected, driven by declining pork prices. We expect CPI to drop to 0%yoy in 4Q with subdued inflationary pressures and high base last year.

• India: the economy has shown further signs of weakness with May data, although the deceleration looks like milder than in April, as a consequence of a partial easing of lockdown since the beginning of the month. Freight Traffc and Electricity Generation declined by 21.3% YoY and 17.8% from 35.3% and 25.8% previously reported. Despite the lack of communication on the complete set of figures, Inflation seemed moderating in May. The fiscal outlook remains very gloomy and Fitch has revised the sovereign ratings outlook to “negative”, while maintaining the rating at BBB-.

• Central Europe: The European Commission proposed a simulation of key allocations according to which CEEs will win except Czechia that could be one of the losers, paying net 0.6€bn (0.3% of GDP). In % of GDP, the biggest winners would be Croatia and Bulgaria. Compared to the initial Budget planned for 2021-2027, Czechia, Poland, Hungary and Estonia will gain less. The disbursements of the recovery fund will likely start only early next year so as the positive growth impact from the recovery fund to CEEs countries is to be expected only from 2021.

• Mexico: overall growth remain very weak with consumptions (durable and services) and investments (particularly public) trending down. Daily data available for the end of May are showing an extremely slow recovery. Inflation in comfortably within the target range and a low level of pass through from the currency weakness is visible. Banxico still enjoys a decent easing room moving forward, relatively higher than other CBs in the EM universe. Despite Mexico remains committed to some fiscal prudence, its Government Debt on GDP is expected to increase due to the weak growth and the use of assets to deal with the Covid crisis.

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

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.