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December 11, 2020
International Economics
International Economic Nick Bennenbroek, International Economist
nicholas.bennenbroek@wellsfargo.com
Outlook Brendan McKenna, International Economist
brendan.mckenna@wellsfargo.com
Jen Licis, Economic Analyst
jennifer.licis@wellsfargo.com
In this issue:
Forecast changes: We maintain our outlook for a broadly weaker greenback against G10 and emerging market currencies
over the course of 2021 and into 2022. Given our forecast for a cyclical upturn in the global economy, we believe emerging
market currencies can outperform, in particular, currencies associated with economies driven by higher commodity prices.
In that context, we have become slightly more optimistic on the short-to-medium term prospects for the Chilean peso and
Brazilian real. In Brazil’s case, we believe fiscal and debt dynamics will stabilize and the Brazilian Central Bank will start to
entertain rate hikes, both providing additional medium-term support to the currency. In the G10 space, our view remains
that EU and U.K. policymakers will avoid a no trade deal Brexit; however, the medium-term prospects for the pound remain
challenging. In contrast, we expect the Canadian dollar to be an outperformer.
Key themes: As 2020 comes to a close, we look ahead to themes that may define the global economy and financial markets
in 2021. Clearly, COVID is still a major concern; however, it should be noted the global economy has entered a new economic
cycle as the recovery is still intact, with only minor setbacks. Deployment of vaccines will play an immediate role in the
strength of the economic cycle, with G10 economies well positioned for a more robust medium-term recovery, while we
expect emerging market economies to drive global growth further out the forecast horizon. In order to facilitate a longer-
term recovery, accommodative policy will need to be kept in place. In our view, the risk of a policy mistake could be
detrimental to the global recovery, while political developments have the potential to disrupt financial markets.
Publication Schedule Change: Beginning in 2021, the publication of the International Economic Outlook will be
shifting toward the end of each calendar month. We anticipate the publication of the next International Economic
Outlook sometime during the week of Jan. 25, 2021.
2020: A Year in Review country level (page 8) and reveal just how disruptive the
At the end of 2019, we, along with many other economists health crisis and subsequent restrictions have been. To give
and forecasters, did not envision a health and human a sense of how impactful the spread of COVID has been, the
services crisis would define 2020. Not only did the longest Eurozone economy contracted 11.7% (not annualized) in Q2,
economic expansion on record in the United States come to the United Kingdom 19.8% (not annualized) and Canada
abrupt end, the global economy fell into recession as the 38.1% (annualized), while the U.S. economy declined 31.4%
worst economic crisis since the Great Depression unfolded. (annualized). Fundamentally weaker countries in the
The spread of COVID has undoubtedly changed the world we emerging markets were affected the most. Countries like
live in. In-person office meetings have turned into work- India and South Africa came under significant pressure amid
from-home virtual calls, while the use of personal protective rampant COVID cases and nationwide lockdowns. The
equipment and the term “social distancing” have become COVID crisis also caused or exacerbated multiple emerging
normal. COVID has tested the capacity of our healthcare market sovereign debt defaults. Argentina, Ecuador,
systems and forced governments to institute widespread Lebanon and Zambia were forced to default on their
lockdown protocols in an effort to contain the spread of the obligations, while some commodity-based economies in the
virus. These virus control measures have in-turn decimated Middle East and Africa are still on the brink of default.
economies around the world. This year, we witnessed the What is also apparent is the COVID crisis has had a much
largest GDP decline on modern record in countries across the more severe impact on the global economy than the previous
developed and emerging world that, in some cases, will take Global Financial Crisis-induced recession. For calendar year
years to fully recoup. 2009, the global economy contracted 0.10%, a much smaller
Based on our forecasts, the global economy will contract decline than our forecasted 2020 contraction, but is still
almost 4% in 2020. Advanced economies will lead the viewed as one of the worst periods for the global economy in
economic decline and are likely to contract over 5%, while modern history. The scars from the Global Financial Crisis
emerging economies will contract around 2.5%. Our GDP are still visible today; however, the COVID-induced
forecasts suggest eye-popping economic declines at the slowdown could bring about even longer-lasting change.
Please see the disclosure appendix of this publication for certification
and disclosure information. 12/11/20 at 1:15 p.m. ET
All estimates/forecasts are as of 12/11/20 unless otherwise stated.
This report is available on wellsfargoresearch.com and on Bloomberg WFREWELLS FARGO SECURITIES
International Economic Outlook – December 2020 INTERNATIONAL ECONOMICS
Multinational corporations are being forced to rethink into his re-election campaign, Donald Trump faced a difficult
supply chains, real estate footprints and the size of their challenge of being re-elected amid a recession as well as one
respective labor forces, while the exodus from large cities to of the worst health crises of our time. Handling and
more suburban locations could be just beginning. management of the virus was a central theme on the
Change has also taken place in the public sector. Elevated campaign trail, highlighted further when President Trump
unemployment rates forced governments to provide and many White House staffers contracted the virus about a
financial support to their respective populations. Direct cash month out from the election. Ultimately, and after a delay
payments in the U.S., Europe, the U.K. and emerging market and contested outcome, Joe Biden was certified by U.S.
countries have helped households stay afloat for the time states and is set to take office in January. Biden will assume
being, while attractive loan programs have helped small the White House likely under a divided Congress, which
businesses keep their doors open. The longer-term should mean no major changes to tax or healthcare policy;
repercussions of these government support programs are however, it is more likely Biden takes a different approach in
unknown as of now; however, government fiscal deficits and regard to trade and other issues with China. Just since the
debt burdens have increased significantly. In the United election, Biden has already suggested he will follow through
States, the fiscal deficit is approaching 20% of GDP and the on taking a multilateral approach to negotiations with China,
government’s debt burden is now over 130% of GDP. Similar a stark difference from the bilateral approach under the
rising deficit and elevated debt burden dynamics have Trump administration.
occurred in other G10 countries as well as in the emerging We have identified a few themes that readers should keep in
markets. As a result, credit ratings have been downgraded mind during their 2021 planning process. The first being that
throughout the year to reflect diminished creditworthiness of the global economy is now entering a new economic cycle.
both developed and emerging market sovereigns. As these This new cycle will be somewhat fragile, especially with
debt burdens are likely to stay elevated for the time being, COVID case numbers rising again. However, the global
the possibility of a more severe debt crisis has increased. economy was on solid footing pre-pandemic, which, despite
Central banks have not been excluded from making the changes we mentioned earlier, should allow for a sharper
adjustments as change has not just occured at the federal rebound than in the aftermath of the Global Financial Crisis.
government level. Central banks have eased monetary policy To that point, it is important to realize the economic recovery
aggressively over the course of the year to offset the economic is already under way. Since earlier this year, lockdown
impact of the virus. Policy rates have effectively been taken measures have been eased and restrictions gradually lifted,
to their lower bounds across the G10, while many central allowing mobility and economic activity to improve. With
banks have started, resumed or expanded quantitative encouraging vaccine news, it is possible the global recovery
easing programs. As of the end of November, assets on the takes shape earlier than we expect; however, we note how
Fed’s balance sheet amounted to 34% of GDP, up from 19% important it will be for policymakers to keep accomodative
at the beginning of the year. The same can be said for the monetary and fiscal policy in place until the economy
European Central Bank (ECB) as the ECB has grown its demonstrates a strong recovery track record. And finally,
balance sheet to 61% of GDP from 39% in January. Central politics and geopolitics are likely to play a role in 2021. We
banks in emerging markets have also taken policy rates would not be surprised if another wave of populist-style
noticeably lower. Rates are the lowest on record in Brazil, candidates emerge from the COVID crisis, particularly in the
Colombia, Chile and South Africa, while rates have moved developing markets, in response to high unemployment
lower by over 100 bps in Russia, India and Mexico. In some rates, diverging wealth per capita and other forms of
cases, mostly in Latin America, constitutions and central inequalities. These themes will be important considerations
bank mandates have been amended to formally permit asset for us when making our economic and currency forecasts in
purchase programs, a measure not even enacted during the 2021 and beyond. In the following pages, we more throughly
Global Financial Crisis. lay out our forward-looking views on the economy and
financial markets in 2021 and how these themes play into our
The impact of the virus resulted in significant disruptions to forecasts going forward.
financial markets as well. Just this year, we saw the VIX
reach a new record high of 82.69, WTI oil prices turn As our 2020 review section comes to a close, we would be
negative, U.S. 10-year yields hit a new record low of 0.31% remiss not to mention the health and human service
and the S&P 500 fall 34% over the course of about one tragedies the virus has created. Globally, over 70 million
month. In addition, the path of the U.S. dollar has been COVID cases have been confirmed, while close to 1.6 million
interesting to watch. Following a spike in March and April on fatalities have been recorded. Second and third waves of
safe-haven flows and liquidity shortages, the U.S. dollar has infections are currently under way in Europe, the United
broadly depreciated against G10 and emerging market States and many less developed countries. As the virus
currencies. From its peak at the end of March, the DXY dollar gathers renewed momentum during the colder Northern
index has fallen 11.5% and foreign currencies have bounced Hemisphere months, we hope readers in those locations are
off their lows. In fact, the drop in the U.S. dollar has been so staying safe and healthy. COVID has affected us all, and
marked, a theme questioning the end of the U.S. dollar’s while it may be less pertinent to discuss economic and
global pre-eminence emerged over the course of the year. financial markets amid the current healthcare crisis, we hope
While we do not believe we are at the end of the U.S. dollar’s readers can use this publication to prepare and assist in their
reign as the global reserve currency, the fact the question is business and investment decision process for the upcoming
being asked puts the dollar’s depreciation in perspective. year.
While COVID was certainly the dominant theme of the year, Healthcare Crisis Turns to New Economic Cycle
one cannot mention the virus without commenting on its As mentioned, we are optimistic about the prospects for the
impact on politics, in particular the U.S. election. Heading global economy in 2021 despite rising COVID cases. In our
2WELLS FARGO SECURITIES
International Economic Outlook – December 2020 INTERNATIONAL ECONOMICS
view, the new economic cycle has already started. For proof near-term, given improved household balance sheets as a
the global economic recovery is under way, we can point to result of sizable fiscal support over the entire course of the
Q3 GDP data, which revealed economies around the world COVID crisis.
are growing again. The rebound can largely be attributed to
Vaccine Global Growth Changer
the forceful response by both monetary and fiscal
The medium-term prognosis for the global economy is more
policymakers, along with some success in containing the
positive. As the distribution of effective vaccines becomes
initial COVID outbreak. Containing the first wave of
more widespread later in 2021, along with the sustained
infections allowed economies to gradually reopen, which
stimulus response from monetary and fiscal policymakers we
sparked an upward surge in economic activity in the third
described earlier, the foundations for a lasting global
quarter of the year. While official figures for G20 GDP
economic recovery are in place. We do, however, expect the
growth are not yet available, based on the countries that have
medium-term recovery to be somewhat uneven. In the very
reported, we estimate G20 Q3 GDP rose 8.7% q/q.
near term, the major developed economies will likely
The mechanical reopening of several economies aided the Q3 underperform based on the renewed spread of COVID cases.
bounce in GDP; however, we remain somewhat optimistic on However, those same developed economies may see a
the prospects for Q4 as well, although with some exceptions. stronger recovery in the middle of 2021 as they gain earlier
We believe it is unlikely blanket or widespread lockdown access to vaccines and have the infrastructure in place to
measures will be re-imposed, with some services based distribute those vaccine doses across their entire
industries likely to stay open and operational. In that populations.
context, the Q4 outlook is still modestly positive given
According to data compiled by Duke University, G10
relatively sound household finances—a product of fiscal
countries may be best positioned, should vaccines become
stimulus deployed to households around the world. For the
more widely available in the near future. To that point, the
OECD countries, which encompasses the major developed
economies, we estimate real household disposable incomes chart below indicates Canada, Australia and Japan have
already purchased enough vaccine doses to cover their entire
rose 6.6% y/y in Q2-2020, while real consumer spending fell
populations, while confirmed cases are also relatively low.
13.2% y/y. As a result, household saving rates are at
Other G10 countries may not be in as strong a position;
historically elevated levels, a factor that can drive consumer
however, the United Kingdom, European Union and the
spending and the continued economic recovery over time.
United States may be able to experience a stronger economic
OECD Household Income vs. Consumer recovery as well. While the COVID burden is more elevated,
7% % year/year Spending the United Kingdom, European Union and the United States
have also purchased enough vaccine doses to cover their
entire populations.
COVID Vaccine Coverage by
Vaccine Coverage (% of population)
0% 600% Population and Burden
CA
500%
Real household gross
disposable income
-7% Real household consumer 400%
spending
300%
UK
AU
CL
-14% 200%
EU US
JP
100%
Sources: Datastream, Wells Fargo Securities NZ IN AR
BR IL
Nonetheless, risks to the near-term growth outlook are ID MX CH PE
0%
rising. The spread of COVID has surged heading into the 0 10,000 20,000 30,000 40,000
Northern Hemisphere winter. The United States, Eurozone
COVID Burden (cases per million people)
and the United Kingdom have been particularly hard hit,
although other emerging European countries have also faced Sources: Duke University and Wells Fargo Securities
an uptick in cases. Amid the rise in virus cases, Eurozone and
U.K. governments have put some restrictions back in place, On the other hand, emerging market countries may not be as
albeit not as stringent as earlier in the year. Given new well positioned as G10 nations. Countries toward the bottom
restrictions, leading growth indicators, such as PMI surveys, right portion of the chart—Brazil, Argentina, Peru and
have slumped, and it seems very likely the Eurozone and Israel—have elevated COVID burdens, while to date, each
United Kingdom will experience yet another GDP government has not purchased a sufficient amount of
contraction in Q4 and sluggish momentum heading into Q1 vaccine doses to cover their entire populations. However,
2021. We believe the United States is better positioned and some emerging market countries are exceptions as Chile has
will record positive growth in Q4-2020 and Q1-2021; purchased enough doses to cover over 220% of its population
however, the outlook is not as positive as it was a few months in an effort to combat a relatively elevated COVID burden. In
ago. In contrast, some emerging market economies, Brazil addition, Indonesia, India and Mexico are interesting in the
and Chile in particular, might see activity hold up in the very sense that the COVID burden across the population is less
3WELLS FARGO SECURITIES
International Economic Outlook – December 2020 INTERNATIONAL ECONOMICS
severe, but the amount of vaccine doses purchased is not provide additional fiscal stimulus before President Trump’s
sufficient to create herd immunity across each country. term is over. As of now, we do not expect another fiscal
When thinking about how vaccines could impact global stimulus package; however, negotiations continue and
growth, vaccine distribution and herd immunity plays an should a deal be made, new stimulus would represent upside
important role. In our view, the global economy is still in to our U.S. 2021 GDP forecast. Across the Atlantic, European
overall recovery mode, and despite some setbacks in Europe government have finally approved a budget deal that allows
and parts of the United States, global GDP growth is likely to for European Recovery Fund to proceed. While there might
be positive over the entire course of 2021. In that context, we still be some slight delays in disbursements, the approval
expect the global economy to expand 5.9% in 2021. The should nonetheless provide the Eurozone with some tailwind
breakdown of our 2021 GDP growth forecast is for advanced in the form of additional fiscal support in 2021.
economies to expand 4.1% and for developing economies to Still, for the U.S., Europe and globally, fiscal stimulus is
grow 7.3%. Clearly, we expect emerging markets to lead the unlikely to be as forceful in 2021 as it was in 2020. For
global recovery by late next year. However, considering the example, after an estimated general government budget
dynamics associated with vaccine purchases, the G10 deficit of 13.9% of GDP for the G20 economies in 2020, the
economies could wind up being a larger contributor to global International Monetary Fund (IMF) forecasts that deficit to
growth over the medium-term portion of our forecast narrow to 8.4% of GDP in 2021. According to IMF forecasts,
horizon. As of now, the United States, Eurozone and United the 2021 deficit will still be noticeably wider than in 2019.
Kingdom are experiencing severe rises in confirmed COVID However, given the delays and pushback to fiscal stimulus
cases and could be first in line to receive vaccines. Should we have already seen in the U.S. and Europe, it is possible
G10 countries administer vaccines earlier, there is upside fiscal support gets removed or tapered off too quickly.
risk to our advanced economy 2021 GDP forecast over the Removal of fiscal stimulus or failure to provide adequate
medium term. fiscal support could place downward pressure on the global
economy at a time where the recovery is still in a tentative
G20 GDP Growth state. As mentioned, some adjustment in fiscal policy is
15% contribution to % y/y growth 15%
expected; however, in 2021 we will be watching how the
Forecast
global economy and financial markets respond to the gradual
10% 10% removal of fiscal policy support.
G20 General Government Budget Balance
5% 5% % of GDP
0%
0% 0% -3%
-5% G7 economies -5% -6%
G8-G20 economies
G20 economies
-10% -10% -9%
Source: Datastream, Wells Fargo Securities -12%
Policy Mistake a Key Downside Risk
Through 2021, and perhaps for most of 2022, we expect the -15%
monetary policy environment to remain accommodative. 2000 2005 2010 2015 2020
The final months of 2020 saw a flurry of quantitative easing
Source: IMF, Wells Fargo Securities
announcements, with the Bank of England (B0E), Reserve
Bank of Australia, Riksbank and European Central Bank all Perhaps more significantly, and more likely in 2022, will be
announcing additional increases to their respective asset how markets react to the exit from, or the prospect of an exit
purchase programs. In 2021, we expect quantitative easing from, quantitative easing. For 2021, we believe the outlook is
programs to stay in place in many G10 countries. As of now, relatively benign with the Federal Reserve, ECB, BoE and
only the Bank of Canada (BoC) is slowing the pace of asset BoJ all likely to continue their asset purchases at an adequate
purchases as the economy is recovering quite robustly; pace. In 2022, however, an end to those purchases could
however, we expect this process to be gradual in nature. For become a more realistic possibility. At the very least, the
all of 2021 and 2022, we expect major central banks such as timing for an exit from quantitative easing is likely to become
the Federal Reserve, ECB, Bank of Japan (BoJ), BoE and BoC a significant topic of market discussion. As a result, it is
to hold policy interest rates steady and expect no hikes to possible there might at some point be echoes of, or a repeat
policy rates from any of these central banks over the course of, the “taper tantrum” that occurred last decade. Overall, we
of our forecast horizon. believe it is the possible eventual exit from quantitative
While there is limited uncertainty surrounding the path of easing that has the greatest potential to slow economic
monetary policy, there is less clarity on fiscal policy and growth or unsettle financial markets. With that said, the risk
markets are likely to place more focus on fiscal stimulus in that a major central bank tapers asset purchases too early in
2021. In the United States, for example, there will be 2021 cannot be ruled out entirely. With our view that a taper
questions on whether the U.S. Congress can reach a deal to tantrum could be a risk to global growth and financial
4WELLS FARGO SECURITIES
International Economic Outlook – December 2020 INTERNATIONAL ECONOMICS
markets, we will be particularly focused on policymaker coordinated approach, utilizing the EU specifically, as well as
comments around QE programs and the duration of these other influential countries to apply pressure on China.
programs. With U.S.-China trade tensions a key source of risk to the
global economy and financial markets the past few years, we
Sum of Fed, ECB, BoJ, PBoC Balance Sheets
USD trillion; market exchange rates; % chg. yr/yr believe risks surrounding trade tensions are skewed toward
35%
a less hostile relationship. Should a coordinated approach
adjusted for moves in the
Fed's U.S. Dollar Index vs. against China be successful in bringing about new
Advanced Foreign concessions or even a Phase II trade deal, existing tariffs
Economies
25% could be partially rolled back. This scenario could take some
pressure off China’s economy and push financial markets
higher. However, the flip side to this scenario is also a very
15%
realistic possibility. A multilateral approach could push
China to dig in against not just the U.S., but the EU and other
major countries around the world. Tensions in this scenario
could escalate further, possibly with new tariffs and other
5%
restrictions applied, weighing again on the global economy
and disrupting financial markets.
As has often been the case in the past, European lawmakers
-5%
have faced challenges in reaching agreement on significant
deals. As the end of 2020 fast approaches, the U.K. and
Source: Datastream, Wells Fargo Securities European Union have yet to reach an agreement on the
details of a post-Brexit trade deal. The key sticking points
2021 Ripe for New Political Risks remain in the areas of fisheries, a competitive playing field
Often a consistent theme of ours, political and geopolitical for standards and subsides, and how an agreement would be
risks could become even more elevated in 2021. With Joe enforced. Even high level meetings between U.K. Prime
Biden likely to take office in the U.S., Biden could mark a new Minister Johnson and EU Commission President Von der
direction for U.S. foreign policy, while the COVID crisis could Leyen have not provided enough of a political push yet to get
bring about a new wave of populist-style political candidates, a trade deal over the line. If past proves prologue again, we
especially in the emerging markets. Starting with Biden, we do expect a last-minute agreement to be reached. However,
expect the former vice president to focus his efforts where he the risk that no deal is reached cannot yet be ruled out. The
has unilateral decision making abilities as he is likely to face pound could be subject to 5% or more downside under that
a divided Congress. Trade policy represents the immediate scenario, while the U.K. economy might barely eke out
arena where Biden can take action. In our view, Biden will positive growth in 2021 even after the massive decline seen
likely conduct trade policy differently than the Trump this year.
administration; however, that is not to say we expect an
immediate return to pre-Trump policies. Political risk in emerging markets is typically more elevated
than in the developed world, and we expect this trend to
One of the key pillars of Biden’s proposed policy on trade is continue in 2021. Fundamentally weaker countries have
to strengthen relations with U.S. allies. In our view, this been hit particularly hard by the COVID crisis, both from an
likely means building stronger trade ties with the European economic perspective as well as a health perspective. In
Union, Canada and Mexico, although his main focus will many of these countries, the population has blamed its
likely be the EU. To facilitate those stronger trade relations government leaders and institutions for failing to contain the
and develop a more conciliatory approach to EU trade, we spread of the virus and for exacerbating already existing
believe tariff threats will likely recede under a Biden wealth inequalities. In our view, these are the dynamics that
administration. In addition, existing Trump administration create a likely environment for more populist-style political
tariffs on $7.5 billion in EU products could potentially be candidates to emerge and potentially be voted into office. We
removed, and any tariff escalations on European autos and saw this unfold in the aftermath of the Global Financial Crisis
auto parts could also diminish under Biden. Similarly, the and have already seen this trend start to materialize late in
Biden administration likely would not threaten to impose 2020. Peruvian President Martin Vizcarra was impeached in
tariffs on Canadian or Mexican goods and will likely continue November amid criticism for the handling of COVID. In
to honor the USMCA trade agreement. addition, President Bolsonaro in Brazil lost a fair amount of
The purpose for strengthening trade relations with allied support in municipal elections as the virus has spread
nations is to take a more stringent approach toward China to rampant throughout Brazil amid Bolsonaro’s continued
influence the behavior of the Chinese government. Although downplaying of the virus even after he contracted the illness.
Biden’s China strategy sounds similar to President Trump’s, Latin America could be a particular hot spot for new anti-
a key difference is Biden’s plan to take a multilateral establishment demonstrations. Protests across the region
approach rather than the bilateral direction under President erupted in 2019 as wealth disparity and inequality became a
Trump. It is not clear whether he would use tariffs as a way focus of demonstrations in Chile, Peru, Ecuador and Bolivia.
to incentivize change from China, or difficult to know In our view, these issues have not completely disappeared
whether Biden would remove some, all or none of the Trump and demonstrations are likely to return when COVID
administration tariffs. But, Biden has stated explicitly that a dissipates. Municipal elections are set for April in Chile,
multilateral approach against China may be the optimal coinciding with the ongoing constitutional rewrite process
tactic. Instead of using harsh rhetoric and threats of bilateral that we expect to become more contentious next year. Local
action, Biden has said that he plans on using a more elections could become a continued referendum against
5WELLS FARGO SECURITIES
International Economic Outlook – December 2020 INTERNATIONAL ECONOMICS
President Pinera and his National Renewal party, and could As we head into 2021, we expect the trend of a softer U.S.
be an indication toward how presidential elections in dollar to continue. Despite rising COVID cases, we still
November may materialize as well. Peruvians will also head believe the prospects for the global economy are promising.
back to the polls in April to decide on another president. It is GDP growth in most major and emerging economies should
still too early in the process to have clarity on leading continue to recover without major disruption next year,
candidates, but with Peru experiencing the worst health especially as vaccine doses start to get rolled out on a wider
impact in the world on a per capita basis, the local backdrop scale as the year progresses. A period of synchronized global
could be brewing for a populist-style candidate to assume growth is typically a backdrop that is supportive of foreign
office. Legislative elections will also occur in Mexico over the currencies and reduces demand for safe haven currencies
summer. Mexico was spared from last year’s demonstrations like the U.S. dollar. Given our forecast for stronger growth in
and already elected the populist Andres Manuel Lopez the advanced and emerging economies in 2021, we expect
Obrador (AMLO) in 2018. However, with President AMLO’s the dollar to stay under pressure.
refusal to deploy fiscal support to the economy it is possible In addition, monetary policy in the United States is likely to
Mexico seeks an even more left-winged party to set local remain ultra-accommodative for at least the next few years.
laws. Asset purchases are likely to remain in place, while the Fed’s
It may take time for this theme to fully play out; however, new average inflation targeting approach should keep policy
Latin American political developments this year could serve rates effectively at 0% for the foreseeable future. If inflation
as an indication as to what kind of response voters in the remains subdued and below 2%, the Fed could even opt to
emerging markets will have to the economic and health ease monetary policy further, another potential source of
crisis. A wave of populism across Latin America is likely a dollar weakness. This kind of policy support, along with the
regional problem at worst in 2021, although the longer-term potential for additional fiscal stimulus in the U.S., should
implications could be felt for years and become more push global equity markets higher. As mentioned, the U.S.
systemic in nature. Populist parties and candidates tend to dollar and equity markets have shown a strong inverse
gather momentum in bunches, and success in one region relationship, and we believe this dynamic should continue
could eventually breed support for populist candidates next year, weighing on the greenback.
across the emerging markets in later years. Given our view for a softer U.S. dollar throughout 2021, we
2021 FX Outlook: Cyclical Currencies to Outperform believe the outlook for foreign currencies will remain
Over the course of 2020, foreign exchange markets have positive next year. Broadly speaking, we are bullish on G10
been particularly volatile. In early 2020, many G10 and and emerging market currencies, with a bias toward more
emerging currencies sold off significantly against the U.S. strength in emerging currencies. As of now, we believe
dollar amid safe-haven flows and a severe U.S. dollar valuations remain attractive in most emerging market
shortage. As the broad-based selloff in currency markets currencies. Real effective exchange rates are at suppressed
diminished and equity markets rallied, the strong inverse levels in most Latin American and EMEA currencies, and we
relationship between the U.S. dollar and global equity believe 2021 will be an environment where many emerging
markets became an important influence over the path of the market currencies can recoup that value. In particular, we
greenback. That is, the U.S. dollar weakened as equity are most optimistic on currencies highly correlated to a
markets pushed higher on persistent monetary and fiscal cyclical upswing the economy and currencies associated with
policy support as well as vaccine progress. As mentioned, the economies that are sensitive to commodity prices. In this
DXY index is down 11.5% on a peak-to-trough basis and context, we favor the Colombian peso, Chilean peso and
down 5.5% year to date. The broad rebound in G10 and recently became more optimistic on the short- to medium-
emerging market currencies has been impressive. Currencies term prospects for the Brazilian real.
highly correlated to a cyclical upturn in the global economy We also like emerging market currencies associated with
have recovered a fair amount of losses, while currencies strong underlying fundamentals and stable politics.
associated with sound fundamentals such as the Chinese Emerging Asia represents this view quite well, and we
renminbi, Taiwan dollar and Korean won have strengthened. forecast continued strength in the Chinese renminbi, Korean
U.S. Dollar Index (DXY)
won and Thai baht. However, there are outliers that do not
104 Performance as of 12/10/2020 fit either of these molds. The Turkish lira should continue to
come under pressure amid weak fundamentals and elevated
political risk, while we believe the Argentine authorities will
100
let the peso continue to float more freely, which should mean
continued peso depreciation. Despite the ruble’s recent
recovery, sanctions risk is elevated with Joe Biden likely to
take office soon and we exercise caution in evaluating the
96 ruble’s path despite strong underlying fundamentals. We
also see medium- to longer-term weakness in the South
African rand and Indian rupee as economic fundamentals
92 are weak and policymakers could be more willing to accept
currency softness to aid the local economic recovery.
As mentioned, we are positive on G10 currencies, although
88
to a lesser degree relative to emerging market currencies. In
similar fashion, we particularly like developed market
currencies highly sensitive to commodity prices and higher
Sources: Bloomberg LP, Wells Fargo Securities equity prices. In this sense, we favor the Canadian dollar as
6WELLS FARGO SECURITIES
International Economic Outlook – December 2020 INTERNATIONAL ECONOMICS
well as the Australian and New Zealand dollars. In addition,
an uninterrupted global recovery should support oil prices,
which can benefit the Norwegian krone as well. We do,
however, see some underperformers in the G10 space. Given
the underwhelming state of the local economy mixed with
lingering Brexit uncertainties, we believe the British pound
will lag other G10 currencies and underperform. In a
scenario where safe-haven demand recedes, the Japanese
yen should also underperform as the currency is typically a
reliable haven for episodes of risk aversion. Should the global
economy and markets continue to improve and bond yields
edge higher, we doubt Japanese bond yields would follow. In
addition, the most historically reliable inverse relationship
between the yen and equities is starting to re-emerge. Thus,
in an overall improving economic and market environment
we expect the yen to lag most G10 currencies.
7WELLS FARGO SECURITIES
International Economic Outlook – December 2020 INTERNATIONAL ECONOMICS
Global Economic Forecasts
GDP CPI
2019 2020 2021 2022 2019 2020 2021 2022
Global (PPP Weights) 2.8% -3.7% 5.9% 3.8% 3.5% 3.2% 3.0% 3.3%
Advanced Economies1 1.7% -5.2% 4.1% 3.7% 1.4% 0.8% 1.3% 1.7%
United States 2.2% -3.5% 4.5% 4.5% 1.8% 1.2% 1.8% 2.1%
Eurozone 1.3% -7.4% 3.6% 2.9% 1.2% 0.2% 0.8% 1.2%
United Kingdom 1.5% -11.2% 3.1% 3.1% 1.8% 0.9% 1.4% 1.6%
Japan 0.7% -5.3% 3.0% 2.0% 0.5% 0.0% 0.1% 0.7%
Canada 1.7% -5.6% 4.1% 3.1% 1.9% 0.7% 1.8% 2.0%
Switzerland 1.2% -3.1% 3.5% 2.0% 0.4% -0.7% 0.1% 0.5%
Australia 1.8% -3.0% 3.3% 3.4% 1.6% 0.7% 1.6% 1.8%
New Zealand 2.2% -4.3% 5.8% 3.3% 1.6% 1.5% 1.4% 1.6%
Sweden 1.3% -3.0% 3.3% 3.0% 1.6% 0.6% 1.2% 1.4%
Norway 1.2% -3.4% 3.5% 2.5% 2.2% 1.4% 2.3% 2.0%
Developing Economies1 3.7% -2.5% 7.3% 3.8% 5.1% 5.1% 4.4% 4.6%
China 6.1% 2.2% 9.6% 5.7% 2.9% 2.8% 2.0% 2.3%
India 4.2% -7.5% 10.9% 5.0% 4.8% 6.5% 4.4% 4.5%
Mexico -0.3% -9.1% 3.4% 2.8% 3.6% 3.5% 3.8% 3.5%
Brazil 1.1% -4.5% 4.8% 2.7% 3.7% 2.6% 3.0% 3.4%
Forecast as of: December 10, 2020. All figures represent year-over-year percent change
1
Aggregated Using PPP Weights
Interest Rate Forecasts
Instrument Current rate Q4 2020 Q1 2021 Q2 2021 Q3 2021 Q4 2021 Q1 2022
United States
Fed Funds (Upper Bound) 0.25 0.25 0.25 0.25 0.25 0.25 0.25
2-Year 0.13 0.15 0.15 0.20 0.20 0.25 0.25
10-Year 0.89 0.90 1.05 1.20 1.30 1.40 1.50
Eurozone
ECB Deposit Rate -0.50 -0.50 -0.50 -0.50 -0.50 -0.50 -0.50
2-Year -0.79 -0.70 -0.70 -0.65 -0.60 -0.50 -0.45
10-Year -0.64 -0.55 -0.40 -0.30 -0.20 -0.15 -0.10
United Kingdom
Bank Rate 0.10 0.10 0.10 0.10 0.10 0.10 0.10
2-Year -0.12 -0.05 0.00 0.05 0.10 0.15 0.15
10-Year 0.17 0.30 0.40 0.45 0.50 0.55 0.60
Japan
Policy Rate Target -0.10 -0.10 -0.10 -0.10 -0.10 -0.10 -0.10
2-Year -0.13 -0.10 -0.05 0.00 0.05 0.05 0.05
10-Year 0.01 0.05 0.10 0.10 0.15 0.15 0.15
Canada
Overnight Rate Target 0.25 0.25 0.25 0.25 0.25 0.25 0.25
2-Year 0.25 0.30 0.35 0.35 0.35 0.40 0.40
10-Year 0.71 0.75 0.90 1.00 1.05 1.15 1.20
Source: Bloomberg LP and Wells Fargo Securities
8WELLS FARGO SECURITIES
International Economic Outlook – December 2020 INTERNATIONAL ECONOMICS
Currency Forecasts
Currency
Pair* Current rate Q4 2020 Q1 2021 Q2 2021 Q3 2021 Q4 2021 Q1 2022
G10
EUR/USD 1.2123 1.2100 1.2200 1.2300 1.2400 1.2500 1.2600
USD/JPY 103.85 104.00 105.00 106.00 107.00 108.00 108.00
GBP/USD 1.3224 1.3300 1.3200 1.3200 1.3300 1.3400 1.3500
USD/CHF 0.8889 0.8925 0.8900 0.8850 0.8800 0.8800 0.8800
USD/CAD 1.2757 1.2800 1.2600 1.2400 1.2300 1.2200 1.2200
AUD/USD 0.7539 0.7600 0.7800 0.8000 0.8100 0.8200 0.8200
NZD/USD 0.7089 0.7100 0.7200 0.7300 0.7400 0.7500 0.7500
USD/NOK 8.7951 8.8025 8.6875 8.5775 8.4275 8.2800 8.1350
USD/SEK 8.4627 8.4700 8.3600 8.2100 8.0650 7.9600 7.8975
Asia
USD/CNY 6.5480 6.5400 6.5000 6.4600 6.4400 6.4200 6.4000
USD/CNH 6.5353 6.5400 6.5000 6.4600 6.4400 6.4200 6.4000
USD/IDR 14080 14000 13800 13600 13400 13200 13000
USD/INR 73.65 73.50 73.50 75.50 76.50 77.50 78.50
USD/KRW 1089.87 1085.00 1080.00 1070.00 1060.00 1050.00 1040.00
USD/PHP 48.08 48.00 47.75 47.50 47.25 47.00 47.00
USD/SGD 1.3361 1.3300 1.3200 1.3100 1.3000 1.2900 1.2800
USD/TWD 28.17 28.00 27.75 27.50 27.25 27.00 27.00
USD/THB 30.10 30.00 29.75 29.75 29.50 29.50 29.25
Latin America
USD/BRL 5.0576 5.0000 4.9000 4.8000 4.8000 4.9000 5.0000
USD/CLP 731.80 730.00 720.00 710.00 720.00 730.00 740.00
USD/MXN 20.0879 20.0000 19.5000 19.2500 19.0000 18.7500 18.5000
USD/COP 3436.00 3400.00 3300.00 3200.00 3100.00 3000.00 2900.00
USD/ARS 82.2018 83.0000 85.0000 87.0000 89.0000 91.0000 93.0000
USD/PEN 3.6025 3.6000 3.6200 3.6400 3.6200 3.6000 3.5800
Eastern Europe/Middle East/Africa
USD/CZK 21.74 22.00 21.25 20.75 20.25 19.50 19.00
USD/HUF 292.27 289.25 282.75 276.50 270.25 264.00 258.00
USD/PLN 3.6617 3.6700 3.6225 3.5775 3.5325 3.4875 3.4450
USD/RUB 73.05 73.00 75.00 77.00 77.00 75.00 73.00
USD/ILS 3.2562 3.2500 3.2300 3.2100 3.1900 3.1700 3.1500
USD/ZAR 15.0977 15.0000 14.7500 15.2500 15.7500 16.2500 16.7500
USD/TRY 7.8252 8.0000 8.1000 8.2000 8.3000 8.4000 8.5000
Euro Crosses
EUR/JPY 125.90 125.75 128.00 130.50 132.75 135.00 136.00
EUR/GBP 0.9167 0.9100 0.9250 0.9325 0.9325 0.9325 0.9325
EUR/CHF 1.0776 1.0800 1.0850 1.0900 1.0900 1.1000 1.1100
EUR/NOK 10.6622 10.6500 10.6000 10.5500 10.4500 10.3500 10.2500
EUR/SEK 10.2595 10.2500 10.2000 10.1000 10.0000 9.9500 9.9500
EUR/CZK 26.35 26.50 26.00 25.50 25.00 24.50 24.00
EUR/HUF 354.33 350.00 345.00 340.00 335.00 330.00 325.00
EUR/PLN 4.4391 4.4400 4.4200 4.4000 4.3800 4.3600 4.3400
Source: Bloomberg LP and Wells Fargo Securities
* Charts show forecast trajectory for the currency pair over the next 18 months.
9WELLS FARGO SECURITIES
International Economic Outlook – December 2020 INTERNATIONAL ECONOMICS
United States/USD
Outlook
Our forecast remains for a gradual softening of the U.S. dollar over the medium term. The renewed spread of COVID cases could
weigh on GDP growth in the near term. Soft growth could also restrain the greenback, albeit modestly since we do not currently
expect further Fed easing. Instead, progress toward vaccine distribution, possible fiscal stimulus and an improving global
economy and market could mean more significant foreign currency strength and greenback weakness over time.
Fundamental Focus: Economics, Policy & FX Economic & FX Risks
'000s U.S. Labor Market Downside FX Scenario
3,500 15%
Correlation with Global Equities
rolling yearly correlation of weekly % change
50%
0 10%
0%
-3,500 5%
Private payrolls
change m/m, 3M -50%
avg, left scale
Jobless rate, right
-7,000 scale 0%
Dollar Index vs. Advanced
Foreign Economies
-100%
Source: Datastream, Wells Fargo Securities
U.S. Economy Still Making Steady Progress Source: Datastream, Wells Fargo Securities
U.S. economic growth continued at reasonable pace into Our base case is for overall U.S. dollar softness over the
Q4, though with increasingly worrying signs of a potential medium term, with the risks weighted toward a faster pace
slowdown in the months ahead. of depreciation.
October real consumer spending rose by a solid 0.5% m/m Potential upside risks for financial markets exist,
and industrial output rose 1.1% m/m. November survey especially if U.S. lawmakers can reach a deal on fiscal
data eased, but to levels still consistent with ongoing stimulus, and vaccine distribution proceeds smoothly.
growth. The November services PMI fell to 55.9, while the The U.S. dollar has shown strong safe-haven
manufacturing PMI fell to 57.5. characteristics this year, or in other words a strong inverse
The November employment report was softer than correlation with global equity markets. With the
expected. Nonfarm payrolls rose by 245,000, less than likelihood that correlation will continue for the time
half the October increase, while private payrolls rose by being, favorable economic and market surprises could
344,000. The jobless rate fell to 6.7%. weigh on the greenback.
The spread of COVID cases has surged over the past The renewed spread of COVID has had a mixed U.S. dollar
several weeks, leading to renewed restrictions in several impact, but could be negative for the greenback overall.
parts of the country. As a result, we now expect only Growth could be slower than expected which could also
marginally positive GDP growth in Q1-2021. potentially trigger Fed easing, which could both weigh on
There are few signs yet that inflation is set to pick up from the U.S. dollar.
its current low levels. The November core CPI was steady Central Bank Outlook
at 1.6% y/y, while October core PCE prices slowed to 1.4%
Fed Funds Rate forecast
y/y.
Current: 0.125% 3M 6M 12M
Further Fiscal Stimulus Still Possible
Wells Fargo 0-0.25% 0-0.25% 0-0.25%
After months of no progress, the possibility of additional
Market Implied 0.10% 0.11% 0.12%
fiscal stimulus has revived with a group of U.S. lawmakers
Source: Bloomberg LP, Wells Fargo Securities
proposing a plan of around $90oB plan. Democratic
leaders said that plan should be used as the basis for The Federal Reserve should hold monetary policy steady
negotiations. Senate Republican leaders are still targeting at its December policy meeting. In addition, we expect the
a less expansive package of around $500B. fed funds rate to remain unchanged through 2021 and
We do not expect a fiscal package to be agreed by year- 2022. An increase in the pace of asset purchases is
end, though perhaps a small deal involving extension to possible at some point, though is not our base case.
unemployment programs could be struck. The chance of
further stimulus in the new year has potentially increased.
10WELLS FARGO SECURITIES
International Economic Outlook – December 2020 INTERNATIONAL ECONOMICS
Eurozone/EUR
Outlook
We see a broadly steady euro in the near term and a modestly stronger euro over the longer term. Renewed COVID spread and
resulting restrictions should prompt a renewed decline in GDP in Q4. That prompted widely expected ECB monetary easing
this month, which had limited effect on the euro. As the economy recovers on monetary and fiscal stimulus, and vaccine
distribution becomes widespread, we expect the euro to appreciate modestly further over time following its recent gains.
Fundamental Focus: Economics, Policy & FX Economic & FX Risks
Eurozone: PMI Indices vs. GDP Growth Upside Scenario
Index % year/year
60 4% Eurozone COVID-19 Cases
180,000 Daily new confirmed cases, 7-day average
50 0%
40 -4%
120,000
30 GDP, right -8%
Services PMI
Manufacturing PMI
20 -12% 60,000
10 -16%
0
Source: Datastream, Wells Fargo Securities
Economic Darkness Before the Dawn
Source: Bloomberg LP, Wells Fargo Securities
The near-term outlook for the Eurozone economy is
negative given the recent upswing in the spread of COVID We expect gradual appreciation in the EUR/USD
cases and associated restriction. exchange rate, however the euro could rise more than
Survey data, in particular, point to at least a temporary expected.
downturn. The Eurozone November services PMI fell to New confirmed COVID cases during the second wave have
41.7, the lowest level since May, while the manufacturing already receded significantly. If the decline in Eurozone
PMI held up better, easing to 53.8. Eurozone November economic activity proves shallower or more short-lived
economic sentiment also fell to 87.6. than expected, the euro could rise faster than we currently
Activity data were mixed, including an unexpectedly expect. More rapid progress toward vaccine distribution
strong October retail sales gain of 1.5% m/m. Nonetheless, could also support the Eurozone economy and global risk
we still expect overall Q4 GDP to decline 3% q/q. sentiment, both euro positive factors.
The longer-term outlook for the Eurozone remains more In this scenario, EUR/USD could appreciate above
hopeful. New confirmed COVID cases have already $1.3000 over the medium term.
receded significantly, while progress toward a vaccine Central Bank Outlook
remains hopeful.
ECB Deposit Rate forecast
Consumer fundamentals remain relatively sound so far,
although we acknowledge some risk of worsening in Q4. Current: -0.50% 3M 6M 12M
Q3 household disposable income rose 3% q/q in Germany Wells Fargo -0.50% -0.50% -0.50%
and 3.7% q/q in France, while employee compensation Market Implied -0.53% -0.56% -0.59%
rose in both Italy and Spain. Source: Bloomberg LP, Wells Fargo Securities
Accommodative Monetary Policy Should Be Growth The ECB delivered its widely expected monetary easing at
Supportive its December meeting. Going forward, given an expected
The European’s Central Bank (ECB) December monetary recovery in the economy over time, we do not expect any
easing could also help the longer-term growth outlook. further asset purchases or lending programs to be
The ECB increased its Pandemic Emergency Purchase announced. In addition, we do not expect any further rate
Program €500B to €1.850T, while extending the program cuts over our forecast horizon. With the ECB’s December
to at least the end of March 2022. action widely expected and the potential for further action
The ECB also added four more targeted long-term lending limited in our view, we do not expect monetary policy
operations, extending the window for the lowest rate on factors to be a significant restraining influence on the euro
long-term lending operations, and eased other terms and over the medium term.
conditions on the lending operations.
11WELLS FARGO SECURITIES
International Economic Outlook – December 2020 INTERNATIONAL ECONOMICS
Japan/JPY
Outlook
We forecast only modest weakness in the yen over the medium term. The economy’s expansion should remain on a reasonably
steady path, with additional government fiscal stimulus likely offering support. Japan’s domestic trends could be of some
support for the yen. However, an improving global environment could see global bond yields rise and equity markets gain
further, which should mean modest overall weakness for the Japanese currency.
Fundamental Focus: Economics, Policy & FX Economic & FX Risks
Japanese GDP Growth Downside FX Scenario
6% % year/year 12%
G10 Currency Performance
% change vs U.S. dollar over past month
AUD
0% 0% CHF
NOK
NZD
GDP, EUR
-6% left -12%
Private CAD
consumption, left
Business capital SEK
spending, right
JPY
-12% -24%
GBP
Source: Datastream, Wells Fargo Securities -1% 0% 1% 2% 3% 4%
A Two-Speed Japanese Recovery? Source: Bloomberg LP, Wells Fargo Securities
Japan’s Q3 GDP jumped 22.9% q/q annualized, a bit more We forecast gradual yen softness versus the U.S. dollar
than forecast. Even with the solid Q3 gain, the economy over the medium term, though there is some risk of more
was still down 5.7% y/y. significant depreciation.
The details showed a somewhat uneven recovery across Market expectations for further monetary easing are
different sectors of the economy. Consumer spending was modest at best. Hence should the central bank deliver
solid, rising 22.1% q/q annualized. Business capital unexpected monetary policy action, the yen would likely
spending disappointed though, contracting at a 9.3% weaken.
pace. October core private machinery orders rose 2.8% U.S. yields have risen as vaccines hopes have improved.
y/y, perhaps pointing to some improvement in business The spread between U.S. and Japanese 10-year
investment moving forward. government yields have also widened from their midyear
A reasonable start to the fourth quarter offers some hope lows, which could weigh on the yen over time.
that a relatively steady recovery can continue. October The yen’s safe haven characteristics, or inverse
retail sales edged up 0.4% m/m, while industrial output relationship with equities, has re-emerged over the past
enjoyed a stronger 3.8% m/m gain. month as the yen has lagged most other G10 currencies.
However the economy watchers survey fell more than Should those safe-haven characteristics be persistent, the
expected in November to 45.6, the lowest level since USD/JPY exchange rate could move towards a
August. JPY110.00-112.00 over the medium term.
The news on the inflation front is a bit more concerning
Central Bank Outlook
than activity trends, with the October CPI falling 0.4% y/y
and the CPI ex-fresh food down 0.7% y/y. BoJ Policy Rate forecast
Current: -0.10% 3M 6M 12M
Fiscal Stimulus Expected, Monetary Stimulus
Possible Wells Fargo -0.10% -0.10% -0.10%
Prime Minister Suga announced package containing 40 Market Implied -0.05% -0.05% -0.07%
trillion yen (7.5% of GDP) of fiscal measures, with 19.2 Source: Bloomberg LP, Wells Fargo Securities
trillion of that cost to be funded by an upcoming third We expect the BoJ’s policy interest rate to remain on hold
extra budget. at -0.10%, and the target for 10-year government bond
It is less certain that the Bank of Japan (BoJ) will take any yields to remain at zero percent, for an extended period.
monetary policy action at its December meeting, although Central bank adjustment remain marginal. The BoJ
there are expectations the central bank will extend the recently said it would pay regional banks +0.10% on a
expiration of its COVID lending/liquidity program portion of their reserves if they agree to commit to
beyond its current March 2021 deadline. mergers or streamline overheads.
12WELLS FARGO SECURITIES
International Economic Outlook – December 2020 INTERNATIONAL ECONOMICS
United Kingdom/GBP
Outlook
We see the pound as somewhat vulnerable for now and expect only modest gains over time. Any relief rally to a post-Brexit
trade deal will likely be short-lived, while substantial sterling downside is likely if agreement cannot be reached. Over the longer-
term the economic outlook remains challenging and the prospect is for only slow growth. That points to only moderate gains in
the pound, even if the Bank of England (BoE) does not ease monetary policy further.
Fundamental Focus: Economics, Policy & FX Economic & FX Risks
U.K. Economic Growth Downside Scenario
% year/year
7%
Exports of Goods and Services
percent of GDP
0% 12%
-7% Goods
GDP
8% Services
Services output
-14% Industrial output
-21%
4%
-28%
0%
Source: Datastream, Wells Fargo Securities United Kingdom Eurozone to
to Eurozone United Kingdom
Economic Momentum Slows, Risks Rise
Source: Bloomberg LP, Wells Fargo Securities
The renewed spread of COVID cases and implementation
of some restriction is starting to show through in the We expect modest gains in the pound versus a soft U.S.
survey and activity data. dollar, though there remains some risk of unexpected
The November services PMI fell to 47.6, a level consistent weakness.
with renewed contraction, although the manufacturing The pace of recovery remains among the slowest of the
PMI unexpectedly rose to 55.6. major developed economies. If the renewed spread of
October activity data suggest the economy was losing COVID persists and restrictions remain in effect longer
momentum even before the latest round of restriction than expected, the rebound in growth in 2021 could be less
went into full effect. October retail sales were solid, rising than the approximately 3% gain we currently forecast.
1.2% m/m. However, broader measures of activity were While not our base case, persistent COVID uncertainty
more subdued. October GDP rose only 0.4% m/m as and slow growth might still prompt further BoE monetary
service sector output edged up 0.2% m/m, although easing.
industrial output did rise by 1.3% m/m. Negotiations surrounding a post-Brexit trade deal are
CPI inflation ticked higher in October, with the headline once again going down to the wire. The key downside risk
CPI rising 0.7% y/y and the core CPI rising to 1.5% y/y. for the pound would be the failure to reach a trade deal,
BoE monetary policy rhetoric remains more dovish than which could see GBP/USD fall below $1.2500 in response.
hawkish, with some policymakers saying a range of tools Indeed, the relief to any trade deal may be brief and a “sell
would be most effective, and suggesting the evidence the fact” response quite plausible, another factor that
regarding negative rates was supportive. However, having could interrupt the pound’s gains versus the greenback.
just eased monetary policy in November, we expect the Central Bank Outlook
BoE to stay on hold at its December meeting.
Bank Rate forecast
Brexit Breakthrough Still Elusive
Current: 0.10% 3M 6M 12M
Brexit discussions continue even as the Dec. 31 deadline Wells Fargo 0.10% 0.10% 0.10%
for a trade-deal looms large. In their most recent
Market Implied 0.04% 0.01% -0.03%
comments, U.K. and EU officials said there are still
differences on fisheries, rules for fair competition and Source: Bloomberg LP, Wells Fargo Securities
governance surrounding a trade deal. We expect the BoE to hold monetary policy steady at its
Our base case is that a last minute deal will be struck, December meeting. The sluggish U.K. recovery means the
though we expect any sterling strength to be short-lived. risks remains tilted towards further easing—that said, our
The pound could suffer significant downside in the U.K. base case is that the central bank will not take interest
and EU fail to reach a trade deal. rates into negative territory or expand its asset purchase
target further.
13WELLS FARGO SECURITIES
International Economic Outlook – December 2020 INTERNATIONAL ECONOMICS
Switzerland/CHF
Outlook
We expect a slightly stronger franc against the U.S. dollar, but a moderately weaker franc versus the euro, over the medium
term. The Swiss economy enjoyed a sizable bounce back in Q3, but some pickup in COVID cases plus the weakness of its
European neighbors suggests a challenging growth environment for the next quarter or two. That should restrain Swiss franc
strength, while an improving global economic and market backdrop could weigh on the Swiss currency over time.
Fundamental Focus: Economics, Policy & FX Economic & FX Risks
Swiss GDP Growth Upside FX Scenario
8% 12%
Swiss Consumer Prices
1.5%
% year/year
4% 6%
0% 0% 0.5%
-4% % qtr/qtr, left -6%
-0.5%
% year/year, right
Trimmed
-8% -12%
Mean CPI
CPI
-1.5%
Source: Datastream, Wells Fargo Securities
Economy to Pause, Not Pullback Source: Datastream, Wells Fargo Securities
Swiss GDP jumped 7.2% q/q in Q3, more than the We forecast a slightly stronger Swiss franc versus the U.S.
consensus forecast, although was still down 1.6% y/y. dollar, but weakness in the franc against the euro over the
With respect to sequential growth, domestic activity was medium term.
especially strong as consumer spending rose 11.9% q/q, A scenario of more significant franc strength versus the
equipment and software investment rose 8.8% and greenback and euro is possible however. Swiss economic
construction investment rose 5.1%. With imports growth has been less negatively affected than its European
outpacing exports, the overall rate of GDP was reigned in neighbors by COVID. Meanwhile while deflation
to some extent. pressures and risks persist, they are not intensifying. For
The outlook for the current quarter is more challenging example, the October trimmed mean CPI actually firmed
given the renewed spread of COVID cases, and with slightly to 0.2% y/y.
Switzerland’s European neighbors likely to see economic Against this backdrop we do not expect the Swiss National
contraction in Q4. Bank to lower interest rates further, while the central bank
That said, we do not expect a significant decline in the could also become less FX interventionist over time. Both
Swiss economy. The government has so far resisted a of these factors could be positive for the franc.
second wide-scale lockdown, while there have also been Whether the franc strengthens from current levels, and by
some government stimulus efforts. The planned stimulus how much, could hinge on global factors–for example, if
measures include an increase in funding for firms the renewed spread on COVID in the U.S. and Europe is
impacted by the pandemic to one billion francs, and a more intense than expected, prompting a worsening in
renewed, targeted expansion of unemployment benefits. risk sentiment, which would likely support the franc.
For full-year 2020, we forecast GDP to fall 3.1%, while we
forecast growth of 3.5% in 2021. Central Bank Outlook
Data Mixed, but Holding Up OK SNB Policy Rate forecast
Current: -0.75% 3M 6M 12M
November survey data were mixed. The KOF leading
indicator eased t0 103.5, but the manufacturing PMI rose Wells Fargo -0.75% -0.75% -0.75%
55.2, the highest since late 2018. Market Implied -0.77% -0.77% -0.77%
October activity data were also reasonably solid. Real Source: Bloomberg LP, Wells Fargo Securities
retail sales rose 3.1% y/y. The October trade surplus rose Our view remains that the Swiss National Bank’s policy
to 2.87B francs as real exports fell 0.5% m/m while real interest rate will remain unchanged at -0.75% for an
imports fell 3.4% m/m. extended period. Only a small cumulative increase in FX
reserves over the past two months also hints at less FX
intervention activity from the central bank.
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