WOOD Flash – EME Macro Strategy: business cycle - calling the low point

In the past three months, significant growth stimulus has been announced by the Fed, the ECB and the Chinese authorities. De facto, the global economy is witnessing almost as much monetary stimulus this year as we had expected to see in 2020E. This creates a rather unusual business cycle inflection point: we should be looking at a renewed acceleration of activity, despite not seeing a recession yet.
We believe that a “no deal Brexit” should be our central scenario, in which case we are likely to see a further weakening of economic activity, with a favourable turning point in 1Q20E. Last night, at the EU summit, an agreement was reached to extend the deadline for the departure of the UK from the EU from 29 March to 12 April. By then, the UK will need to say whether it wants to continue negotiations, unilaterally withdraw from the Article 50 process or leave without a deal. We see a “no deal Brexit” as the most likely scenario. If we are correct, we are likely to see three quarters of weakening of economic activity, with a favourable turning point close to 1Q20E. If we are right on this call, the disruption due to Brexit would be met by further monetary stimulus and coordinated fiscal stimulus: the effects should begin to be visible in 2020E. If we are wrong, then early signs of a turnaround (favourable) of the business cycle should become apparent as early as this summer.
We reiterate the depreciation risks for the RON, the TRY and the GBP, while our view on the USD is unchanged. Inflationary pressures are likely to remain muted after this summer in the case of a hard Brexit, but keep an eye on oil prices as the risk of a jump is increasing, in our view.
The prospects for 2020E will depend critically on the magnitude of the fiscal stimulus injected. Turkey, Romania and Italy have less fiscal space than most, so they could surprise to the downside the most relative to the current consensus projections.