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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