World View as Seen from the AmericasStephen Leach, Economist, Foreign Exchange, Citi
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Disclaimer
The views expressed in this document are those of the author only and may not agree with those of Citi and/or its research team.
The COVID-19 crisis is evolving rapidly. As a result, views expressed herein may also be subject to change.
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Introduction
The rest of the world Latin America
Thinking about economic policy & performance, exchange rates & financial markets, & political change in a world of Covid-19
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Contents
Covid-19: the basics
The global economy
Monetary policy
Fiscal policy
Other policies
Exchange rates
Concluding thoughts
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Covid-19
0
10
20
30
40
50
60
70
COVID-19: New Infections
North America Latin America World ex-WestHem
‘000, 7-day moving average
Source: Bloomberg, accessed June 17, 2020
Rising infection rate implies that the economic crisis will last much longer than originally hoped
New concerns about second waves
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Covid-19
FLATTENING THE CURVE
Health system capacity
Without protective measures
Infe
ctio
ns
With protective measures
Containment was to prevent the number of infections exceeding the health system’s capacity…..
…..not to eliminate the virus
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The global economy
World Bank: GDP growth during periods of global recession
1975 1982 1991 2009 2020
World +1.1% +0.4% +1.3% -1.8% -5.2%
Advanced economies +0.2% +0.3% +1.3% -3.4% -7.0%
Emerging/developing +4.2% +0.9% +1.5% +1.8% -2.5%
Source: World Bank, Global Economic Prospects, June 2020
The deepest recession, the shortest recession but a slow recovery
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The global economy
70
75
80
85
90
95
100
105
110
U.K. Monthly GDPIndex, 2016 = 100
Source: U.K. Office for National Statistics, June 12, 2020 release
Unfortunately not the only example of a dramatic collapse in output
Following the global financial crisis it took five years to regain the previous peak level of output
NB: Pre-GFC trend = +3.0% pa; post-GFC trend = +2.0%
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The global economy
Return to work Return to playvs.
In theory, the production of goods can rebound much faster than the supply of services that require social interaction as containment restrictions lifted
But are the workers available?
Headwinds from overseas?
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The global economy
25
30
35
40
45
50
55
60
CHINA: Manufacturing PMI New Orders
New orders New export orders
Index
Source: Bloomberg
25
30
35
40
45
50
55
60
New orders New export orders
CHINA: Non-manufacturing PMI New Orders
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The global economy
A STYLIZED VIEW OF THE ECONOMY
A sharp initial rebound once containment lifted…..
…..but a slow, hesitant recovery subsequently
Far from a V…elements of a U due to lack of synchronization across countries
Concern: if fiscal support removed too soon then a W
A return to Q4 ’19 by the end of ‘21 or ’22 or…..
Second waves?
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The global economy
400
420
440
460
480
500
520
540
U.S. RETAIL SALES US$ billion
Source: Bloomberg
88
91
94
97
100
103
106
109
112
U.S. INDUSTRIAL PRODUCTIONIndex
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Monetary policy
Weak economies
High unemployment
+Low inflation/
deflation
Industrial economies
Monetary policy to remain extremely accommodative for the indefinite future
Debate about negative policy rates resurfacing despite earlier determination of their ineffectiveness
“Whatever it takes” is now the mantra due to concerns about economic scarring
The Fed’s “projected policy path” for its target Fed Funds rate stays at 0.1% until 2022 – when it rises to 0.1-1.1%.
The BOJ : a similar story
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Monetary policy
-1500
-1000
-500
0
500
1000Basis points
Source: Bloomberg – as of June 15
EMERGING MARKETS: Aggregate Interest Rate Changes
Emerging markets
With typically less fiscal space than industrial economies, the onus of policy is toward interest rate cuts…..
…..the trend has further to run
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Fiscal policy
0%
2%
4%
6%
8%
10%
12%
HK
SG AU
US
EU NZ
PE KR
TW CL
MY
JP CO
CA
BR
GB
HU
ID CN
UY
CH
PH RU
PL PK TH EG AR
CZ
IL NG
KE
IN MX
Per cent of GDP
Source: CitiFXWire, ‘Coronavirus Update’, June 11, 2020
FISCAL SUPPORT PROGRAMS
Fiscal ‘support’ not ‘stimulus’
Disappointing/limited response by China
The richest countries tend to have the most scope for increased spending &/or reduced taxes
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Fiscal policy
Near-term: more fiscal support as earlier measures expire or are recognized to be inadequate
Longer-term: fiscal support reduced /run down as economies rebound but also due to concern about rising deficits & debtConcern that
support withdrawn too quickly
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Other policies
Increasing trade protectionism
To help support domestic production
Reaction to increasing nationalism
Cross-border M&A
Enhanced official scrutiny
‘Artificially depressed prices’
Visa/migration policy
A less welcoming environment
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Concerns?
Economic hysteresis or scarring – the idea that there can be long-term negative effects from the current crisis
Sharply higher unemployment – 30% permanent job losses?
Education – less development of human capital
Corporate bankruptcies & collapsed businesses
Stranded assets
More cautious investment & saving – slower productivity growth & innovation
Threat to global supply chains
Economic & political nationalism = reduced international policy cooperation & coordination
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Exchange rates
97
100
103
106
109
112
115
TRADE-WEIGHTED VALUE OF THE DOLLARJanuary 17 = 100
vs. Emerging Markets
vs. Advanced economies
January 17 : just before the market started to pay attention to Covid-19
March 6: the collapse of the OPEC+ production cut agreement
March 23: Fed policy response
Source: Federal Reserve, Bloomberg, Citi; data as of June 12, 2020
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Exchange rates
USD
Depreciation during ‘in-between’
periods, where the U.S. is not leading
the global economy
Strong during ‘risk off’ environments/safe haven demand/deep global downturn
Strong when the U.S. economy is booming, leading the global economy
Depreciation Appreciation
MAJOR CURRENCIES
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Exchange rates
Collapse of OPEC+ agreement
Re-evaluation of emerging markets
Sudden stop to capital flows
Countries which are capital importersversus those that are exporters
EMERGING MARKET CURRENCIES
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Exchange rates
Sudden stop to capital flows
• Depreciation
• Intervention, drawing on
• Reserves
• New external debt
• Loans from the IMF & other MFIs
• Debt relief/default/restructuring
• Exchange controls & capital controls
• Trade protectionism
• Clear discrimination between the rich & the poor
• Will IMF loans be sufficient?
• More countries to seek debt relief?
• Will China forgive bilateral loans?
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Concluding thoughts
The uncertain path of the pandemic, the timing and the severity thereof means that the economic outlook for the next few years is quite uncertain
For a number of countries in 2019, there was the sense that they had never fully recovered from the global financial crisis ten years earlier; the likelihood is that ten years from now there will be many countries with the same view
But this places even more emphasis on the necessity of ensuring that economies can recover quickly to minimize the risk of scarring
Many of the economic ideas established over the years – whether in regard to interest rates or budget deficit or debt – now need to be re-examined
The political outlook – which we have not discussed – is equally fraught with uncertainty. Does polarization increase or will there be a recognition of the benefit from cooperation?
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