Economic Snapshot Latin America
February 18, 2014
Latin America’s growth forecasts deteriorated for the 10th consecutive month in February. LatinFocus Consensus Forecast panelists cut the region’s GDP forecasts by 0.1 percentage points to 2.7%. This month’s downward revision reflects lower prospects for 5 of the 11 economies surveyed and included a sizeable cut to Argentina’s growth prospects. The outlook was not changed for 5 economies, including the region’s largest players, Brazil and Mexico. Meanwhile, the GDP growth projection for Bolivia was revised up. For 2015, forecasters left the region’s growth prospects unchanged at the 3.2% increase expected last month.
In the global arena, developed economies continue showing signs of improvement, although with some setbacks. In the United States, preliminary data indicated that the economy increased 1.9% in 2013, which was below the 2.8% expansion tallied in 2012. For 2014, the U.S. economy is expected to accelerate to a 2.9% expansion. In her first Congressional testimony as Federal Reserve Chairwoman, Janet Yellen emphasized the continuity of Ben Bernanke’s monetary policy, while adding that the Fed will continue to unwind the extraordinary monetary stimulus as long as data support it. On the other side of the Atlantic, the economic news flow for the Euro area remains encouraging. Eurozone GDP increased 0.3% over the previous quarter in Q4, supported by growth in Germany and France. In addition, the Netherlands grew a healthy 0.7% and Italy recorded its first expansion since 2011. Panelists see the Euro area economy bouncing back from a 0.4% contraction in 2013 to a 1.0% expansion in 2014.
This month, analysts’ attention shifted to emerging economies, in specific, China. Recent indicators point to a softening in growth in the world’s second largest economy. China’s GDP slowed slightly from a 7.8% increase in Q3 to a 7.7% annual expansion in Q4 2013. Moreover, the PMI declined again in January, reaching the lowest level in six months. Forecasters expect that GDP will moderate from the 7.7% increase recorded in 2013 to a 7.5% expansion this year. For 2015, panelists see China’s economic growth decelerating further to 7.4%.
In Latin America, recent indicators paint a rather bleak picture of the Brazilian economy. In December, economic activity and industrial production both a hit five-year low and retail sales fell for the first time since February 2013. In January, business confidence was down slightly and consumer confidence dropped to the lowest level since June 2009. On the external front, the current account gap widened in December. Meanwhile, a severe drought in recent weeks took its toll on agriculture output and energy production. These developments came at delicate time, as the government has been forced to spend additional resources on alternative sources of energy to make up for a considerable drop in the production of hydroelectric power. LatinFocus Consensus Forecast panelists left Brazil’s GDP growth forecast for 2014 unchanged at the 2.1% expected last month. In 2015, the Brazilian economy is expected to grow 2.2%.
In Mexico, economic activity came in at a disappointing flat year-on-year growth in November, which was below the 1.4% expansion registered in October. More recent data showed mixed results in December: industrial production decreased for a second consecutive month, but the unemployment rate fell to a five-year low. Mexico’s external sector showed promise in December and the trade balance surplus, driven by healthy growth in exports, overshot expectations. Leading indicators, however, suggest that the economy got off to a weak start in 2014. In January, the IMEF manufacturing indicator fell back into contraction territory and consumer confidence fell to the lowest level in over three years.
On 5 February, ratings agency Moody’s upgraded Mexico’s credit rating from Baa1 to A3 with a stable outlook. After Chile, Mexico is the second economy to earn the desired grade “A” sovereign rating. The agency cited the structural reforms that President Enrique Pena Nieto pushed through in 2013 as the main reason behind its decision to revise the country’s rating. Moody’s added that the reforms approved in Mexico last year, “will strengthen the country’s potential growth prospects and fiscal fundamentals.” Meanwhile, analysts expect that credit agencies Standard & Poor’s and Fitch Ratings will follow suit and upgrade Mexico’s sovereign ratings by the end of this year or the beginning of next year. LatinFocus Consensus Forecast panelists maintained their growth projections for 2014 unchanged at January’s 3.4%. For 2015, panelists see Mexican GDP growth accelerating to 3.9%.
The credit upgrade could not come at a better time for the Mexican currency. In February, the Mexican peso (MXN), along with a host of emerging market currencies, weakened against the U.S. dollar (USD), reflecting investors’ jitters regarding the U.S. Federal Reserve’s decision to continue tapering its bond purchases as well as the deceleration in the Chinese economy. This translated into a massive sell-off in emerging-market assets, which prompted several currencies to fall against the USD. However, the markets’ reaction to Mexico’s credit rating upgrade was generally favorable, which provided support to the MXN against USD and mitigated the negative effects of the tapering of quantitative easing (QE). Meanwhile, on top of the recent volatility in financial markets, the Argentinean peso (ARS) recorded its largest drop in twelve years on 23 January. The plunge reflected the Argentinean Central Bank’s decision to scale back intervention in foreign exchange markets in order to preserve dwindling international reserves. Following the devaluation, President Christina Fernandez de Kirchner’s administration relaxed a portion of the capital controls that it had implemented after she won re-election in 2011.
Regarding price developments in January , higher inflation readings were recorded in Colombia, Ecuador, Mexico, Paraguay, Peru, Uruguay and Venezuela. In Venezuela, inflation continues to hover above the 50.0% mark. The National Statistics Institute (INDEC) of Argentina released a new consumer price index on 13 February in an effort to restore confidence in the official inflation data.According to the new figures, consumer prices increased 3.7% over the previous month in January. INDEC did not publish figures for annual inflation. Given that the new consumer price index is likely to result in higher inflation figures for Argentina, LatinFocus panelists revised their inflation projections upward. Accordingly, participants expect regional inflation to close 2014 at 9.0%, which is up 0.8 percentage points from last month’s forecast. For 2015, forecasters also revised their projections up from the 7.6% expected in January to the current 8.2%.
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