Chaganomics

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Here is an edited LatAm research post: After a weak 2019, regional growth is expected to regain steam next year. The acceleration wi...

Here is an edited LatAm research post:



After a weak 2019, regional growth is expected to regain steam next year. The acceleration will be driven chiefly by a pick-up in Brazil’s economy, thanks to monetary easing and reviving confidence. Growth is also seen accelerating in Chile, Mexico and Peru. However, Argentina is expected to remain in recession amid high inflation and policy uncertainty.

Economic Overview
The economy is set to remain stuck in recession next year. Investment will likely plunge amid downbeat business sentiment and sky-high interest rates, while runaway inflation will continue to eat into consumer spending; the external sector, however, should continue to support growth. A radical shift towards far-left policies poses a significant downside risk to the economy.

ARGENTINA
After slipping this year, growth is seen accelerating next year on revived sentiment and accommodative monetary policy. In addition, a government measure to allow workers to tap into an unemployment benefit fund should boost household spending. Risks to the outlook linger, however, particularly weak export prospects amid the ongoing crisis in Argentina.

BRAZIL
Growth is expected pick up next year, although at a slower pace than previously reported. Fiscal concessions are seen boosting private consumption, while higher copper prices and a more benign external environment should prompt an export rebound. Nevertheless, capital investment will likely cool somewhat amid heightened domestic uncertainties.

CHILE
Growth is seen sustaining solid momentum next year as lower corporate taxes and fiscal exemptions enable a healthy expansion in fixed investment, while lower inflation should allow for solid private consumption growth. Nevertheless, delays to amend the tax scheme pose downside risks to the investment and fiscal outlook, at a time of heightened external risks.

COLOMBIA
The economy is seen picking up steam next year amid a rebound in government and capital spending, and stronger household consumption. Looser monetary conditions should also lend support to overall growth. Pemex’s fragile financial state, policy uncertainty, a subdued global growth environment and the risk of
reemerging trade tensions with the U.S. dampen the outlook.

MEXICO
The economy is set to pick up some steam in 2020, following a notable slowdown in 2019, powered by stronger domestic demand and a more benign external backdrop. Fixed investment is seen keeping pace thanks to growing infrastructure spending, while private consumption should also benefit from rising consumer confidence. Political uncertainty lingers in the background, however.

In Depth:

VENEZUELA
A rare release of data published by the Central Bank on 19 October revealed that the economy contracted by more than a quarter in annual terms in Q1, while prices shot up above 50% over the previous month in September. Hefty U.S. sanctions and chronic power outages have crippled the oil industry, which has seen production plummet by more than 40% since the start of the year until September. Hard-hit oil exports have curbed access to U.S. dollars required to pay for imports, in turn draining foreign reserves. In a bid to ameliorate the grim situation, on 29 October the National Constituent Assembly voted to exempt Russian energy giant Rosneft from value-added and export taxes to incentivize joint gas production. Meanwhile, the opposition is striving to retain control of PDVSA’s U.S. refining unit Citgo—the country’s most valuable overseas asset—filing a lawsuit to annul the 2020 bond issued by the state-owned oil company on the grounds that its issuance was illegal.

On 19 October, the Central Bank of Venezuela (BCV) released fresh macroeconomic data for the first time in six months, which underscored the severity of the crisis currently gripping the country. The economy contracted 26.8% in year-on-year terms in the first quarter of the year—the latest period for which data became available—following a 20.2% drop in the previous quarter. The downturn marked the 21st consecutive quarter of falling output and was the sharpest on record. Overall, the economy shrank 19.6% in 2018 (2017: -15.7%) and more than half since 2013, with output down to levels not seen since the late 1990s. The steeper decline in output in Q1 2019 compared to the prior quarter reflected a sharper contraction in domestic demand. Private consumption plunged 34.8% in year-on-year terms, the most severe decline since at least 1999 (Q4 2018: -25.4% year-on-year). Despite frequent hikes to the minimum wage, runaway inflation—largely fueled by exchange rate misalignments— has significantly eroded the purchasing power of households, with high unemployment further curbing spending.

Moreover, fixed investment tumbled 43.7% year-on-year in the quarter, falling continuously since Q2 2015 (Q4 2018: -39.4% yoy), while government expenditure fell 23.9% year-on-year, a markedly bigger drop from the previous quarter (Q4 2018: -8.4% yoy). On the external front, exports of goods and services—in which oil shipments account for the overwhelming majority—rebounded strongly in Q1, contrasting a slump in the previous quarter (Q1 2019: +34.8% yoy; Q4 2018: -9.3% yoy). Imports, however, plunged at the sharpest since Q4 2017 (Q1 2019: -17.4% yoy; Q4 2018: -1.4% yoy). Meanwhile, on the production side, activity in the non-oil segment of the economy shrank 27.3% in Q1 2019 over the same period in 2018 (Q4 2018: -20.4% year-on-year) as manufacturing output more than halved in annual terms and mining production fell more than one-third year-on-year. Furthermore, the all-important oil sector—which accounts for a significant share of foreign exchange earnings and government revenues—contracted more sharply and for the 16th month running (Q1 2019: -19.1% yoy; Q4 2018: -14.7% yoy).

Oil production has been on a steady decline since 2015 due to years of mismanagement, corruption, underinvestment and brain drain, and has been curtailed more recently by the imposition of economic sanctions. Looking ahead, the near-term outlook is bleak. Out-of-control inflation, dwindling oil production and a dysfunctional exchange rate regime will continue to cripple the economy, while financial sanctions aimed at choking off the government’s access to hard currency only worsen the already dire situation. FocusEconomics panellists project that GDP will contract 7.5% next year, which is down 0.7 percentage points from last month’s forecast. For 2021, panelists expect GDP to rise 2.1%.


New to 2020 - we will begin to weave in content from Zermatt Credit Research, which is a sister company to Chaganomics. From Goldman...




New to 2020 - we will begin to weave in content from Zermatt Credit Research, which is a sister company to Chaganomics.

From Goldman:

In the last two weeks investor sentiment has turned materially more positive, driving a pro-cyclical rotation - where gold holdings have been sold down and rates have rallied. Our strategists highlight that this change in sentiment which started last week was heavily influenced by growth optimism leading to an unwind of defensive positioning. In this period, yields on the US 10-year have rallied, moving close to 1.9% from September lows of c.1.5%. This puts our bullish gold view in flux; meanwhile, PGMs, particularly palladium and rhodium, have continued to perform as their structural drivers of industrial demand remain supportive.

From the EPA: On October 15, 1997, EPA issued the first in this series of reports, entitled "The Benefits and Costs of the Clean Air Ac...





From the EPA:
On October 15, 1997, EPA issued the first in this series of reports, entitled "The Benefits and Costs of the Clean Air Act, 1970 to 1990," following completion of a six-year process of study development and outside expert review. The report shows that the public health protection and environmental benefits of the Clean Air Act exceeded the costs of its programs by a large margin.

U.S-China Trade War On 11 October, U.S. officials announced a “Phase 1” partial deal with China was in the works. While short on detail, ...

U.S-China Trade War

On 11 October, U.S. officials announced a “Phase 1” partial deal with China was in the works. While short on detail, the deal will supposedly include terms on Chinese purchases of agricultural goods, intellectual property provisions and a currency pact. Moreover, the U.S. cancelled the tariff hike that was scheduled for October, which would have increased duties from 25% to 30% on USD 250 billion of Chinese goods. Following the announcement of the deal, U.S. President Trump boasted that China would increase its purchases of American farm products to USD 40-50 billion a year. However, while Chinese officials confirmed the country would boost its spending, an official figure was not released. China purchased only USD 9 billion in U.S. agricultural commodities in 2018, down from USD 20 billion in 2017.

Despite signs of progress, the nearly two-year-long trade war remains shrouded in uncertainty, especially as the terms of the mini-deal have not yet been put in writing. Officials hinted that the phase 1 deal could be signed by the two leaders at the upcoming APEC meeting in Chile in mid-November. Even so, Trump acknowledged the deal could fall apart before then.

The reported partial deal, while covering some trade issues, generally picked the low-hanging fruit, leaving the more difficult issues for a later time. The deal may boost business sentiment in the short-term and could bring some reprieve to the industries that have been most affected by the trade dispute, such as the agricultural sector, thus reducing the drag on growth in the final quarter of 2019. However, FocusEconomics panelists and markets alike are not overly optimistic the two sides will resolve the thornier disagreements; a comprehensive agreement will be essential in order to provide lasting support to business confidence and boost investment.



Everyone is waiting on silver to pop! Silver prices have fallen back in recent weeks, on a slight easing of global trade tensions and...

Everyone is waiting on silver to pop!



Silver prices have fallen back in recent weeks, on a slight easing of global trade tensions and a strong dollar. Silver traded at USD 17.5 per troy ounce on 4 October, which was 9.8% lower than on the same day last month. However, the price was up 12.8% on a year-to-date basis and was 19.6% higher than on the same day a year prior. The U.S.-China trade war appeared to ebb slightly over the last month, after the two countries agreed to restart talks. This reduced safe-haven demand for precious metals, hitting silver prices. Moreover, the strong dollar likely had an effect, as this made purchasing silver more expensive for holders of other currencies, while soft global manufacturing activity—many countries’ manufacturing PMIs are currently close to or below the 50-threshold signifying worsening operating conditions— could have hit industrial demand. Going forward, prices are seen remaining relatively stable, propped up by a recovery in industrial production next year. The evolution of the U.S.-China trade war will be a key factor to watch in coming months, due to its potential to affect both safe haven and industrial demand. FocusEconomics Consensus Forecast panelists expect prices to average USD 17.3 per troy ounce in Q4 2019, before rising further to an average of USD 17.2 per troy ounce in Q4 2020. Compared to last month, 2 revised down their Q4 2019 forecasts. Moreover, 9 panelists made no changes to their projections, while 6 lifted their estimates. There continued to be a notable divergence in panelists’ views: The maximum price forecast for Q4 2019 was USD 19.7 per troy ounce, while the minimum projected price was USD 14.9 per troy ounce.


ISM indicates a manufacturing recession - ING Economics The US ISM manufacturing index may have risen for the first time in March, but it...


ISM indicates a manufacturing recession - ING Economics


The US ISM manufacturing index may have risen for the first time in March, but it remains in contraction territory at 48.3 (50 is the break-even level). Moreover, it was weaker than the 48.9 consensus estimate and it has only been weaker twice in the past ten years. Adding to the sense of gloom for the sector, the report shows that this is the third sub-50 reading in a row with the production component dropping to its lowest level since April 2009. Orders and employment continue to contract with the one bright spot being a remarkable surge in export orders – tariff truce related? – to 50.4 from 41.0. More at ING