Economic Snapshot Latin America
April 15, 2014
The 2014 economic outlook for Latin America deteriorated again this month and thus continued on the downward trend that began a year ago. LatinFocus Consensus Forecast panelists cut the region's GDP growth projection for 2014 from the 2.5% increase expected in March to 2.3%. At the current rate, the region will experience a slight deceleration compared to the 2.6% increase that is estimated for 2013. This month's downward revision was the result of a sizable cut to the growth forecast for Argentina, as well as lower projections for Chile, Mexico and Venezuela. Projections were left unchanged for Bolivia, Brazil, Colombia, Ecuador and Peru, while growth prospects improved for Paraguay and Uruguay. Panelists expect the region's GDP to accelerate to a 3.0% expansion in 2015 due to support from stronger global demand and the key structural reforms that some countries have implemented.
Panelists have observed near-term downside risks to the global outlook in recent weeks, which stem from a number of factors including the possibility that the Chinese economy may decelerate, geopolitical tensions in Ukraine, and increasing concerns over the real state of Japan's economic recovery.
Following a State Council meeting, the Chinese government announced a number of measures that are designed to stimulate economic growth on 2 April. The measures are modest in terms of stimulus scale and focus mainly on railway construction, funding for housing, and extending small business tax relief. The announcement was made along with the release of new economic data, which continue to suggest that economic momentum has slackened in recent months.
The Ukrainian crisis continued to dominate headlines over the past month. After Russia annexed the Crimean Peninsula, the West, led by the United States, announced a series of sanctions that mainly target individuals who are assumed to be close to the Putin administration. The West stated that sanctions would increase in response to further Russian aggression. Recent developments suggest that Moscow is now more likely to use economic tools to achieve its political goals in Ukraine versus carrying out a direct military assault on its neighbor.
In Japan, concerns are mounting regarding both the state of the country's economic recovery and the true success of Abenomics. Recent GDP data showed that the economy failed to pick up speed in the last quarter of 2013, while more recent data continues to send mixed signals. In an effort to tackle Japan's ballooning public debt, the government raised the sales tax from 5.00% to 8.00% on 1 April. This is the first tax increase of its kind in 17 years. Most analysts believe that the tax hike will dampen economic activity in the coming months.
In Latin America, industrial production data for Brazil showed that output expanded a seasonally-adjusted 0.4% over the previous month in February following a 3.8% expansion in January. In year-on-year terms, growth in industrial production bounced back from a 2.4% contraction in January to a 5.0% expansion in February, which partially reflected the fact that the Carnival holiday took place in February last year but in March this year. Most analysts agree, however, that industrial production data was volatile and thus did not reflect a consistent recovery in the industrial sector. March business sentiment confirmed that firms are pessimistic regarding both the current economic situation and economic prospects. As a result, lackluster growth in industrial production and in investment is expected to continue. On the external front, the current account deficit was narrower than expected in February, although the deficit over 12 months did widen.
On a negative note, severe weather conditions are putting additional pressure on Brazil's food and energy prices. Persistently low rainfall and high demand for energy have lowered reservoirs in the country's hydroelectric power plants to critical levels. Although most analysts believe that the government should adopt energy rationing as a pre-emptive measure for the time being, the government is likely to try to avoid doing so in order to mitigate political costs ahead of October's presidential election. On 24 March, credit ratings agency Standard & Poor's (S&P) downgraded Brazil's long-term sovereign rating from BBB to BBB-. The downgrade reflects a deterioration in public accounts, uncertainty regarding the government's fiscal policy, and subdued economic growth. The downgrade had an impact on the already-low popularity of Dilma Rousseff's leftist government. LatinFocus Consensus Forecast panelists expect Brazil's GDP to increase 1.8% in 2014, which is unchanged from last month's forecast. In 2015, the economy is expected to grow 2.1%.
In Mexico, January data showed that the economy had a weak start to the year. Economic activity increased a paltry 0.8% year-on-year in January, which came in below the 1.1% expansion observed in December. The moderate increase reflected a slight improvement in manufacturing, while a contraction in agriculture dragged on growth. The latest indicators, nevertheless, continue to suggest that a recovery may be under way. The trade balance surplus was larger than expected in February due to strong growth in exports and in March, the IMEF manufacturing indicator rose to 52.7 points-the highest level in 19 months. After stabilizing in February, consumer confidence rose notably in March.
On 21 March, in compliance with the energy reform that was approved in December 2013, state-owned Petroleos Mexicanos (Pemex) presented the Energy Ministry with the "Round Zero" list of oil fields in which it would like to continue operating when the energy market is open to private investment. The move marked the first concrete step toward ending Pemex's 75-year monopoly on Mexico's energy sector. The Energy Ministry and the National Hydrocarbons Commission (CNH) will have six months to review Pemex's wish list and assess whether the energy firm has the technical, financial and capacity resources required to operate the fields it has selected, or whether private sector participation will be required.
LatinFocus Consensus Forecast panelists lowered Mexico's growth prospects for 2014 from the 3.2% that was expected last month to 3.1%. Next year, as the U.S. economy is expected to recover and the initial impact of the reforms is likely to lift economic growth, panelists expects Mexico's economic growth to pick up to 3.9%.
In Chile, economic activity is still weak despite February's mild increase. The current downward trend is mainly attributable to a deterioration in investment growth, especially in the mining sector. The current downward risks to the mining sector are related to a deceleration in the Chinese economy and pessimism within the Chilean business community, which reacted negatively to the fiscal reform. The reform that newly-elected Michelle Bachelet unveiled on 31 March is aimed at funding the education reform that she pledged to undertake during her campaign. The government expects to raise USD 8.2 billion annually in fiscal revenues (approximately 3.0% of GDP) by 2018 with the reform, mainly by raising corporate taxes and removing the taxable profit fund (FUT).
In Latin America, higher inflationary pressures reappeared in the first quarter and, consequently, regional inflation expectations rose again. LatinFocus panelists revised their inflation projections upward this month and now project the regional average to close 2014 at 10.7%, which is 0.7 percentage points higher than last month's forecast. At this forecast rate, inflation will close the year in double-digits for the first time since 2002. For 2015, forecasters also raised their inflation projections from March's 8.5% to 9.3%. On the monetary policy front, the only country that did not stay put was Brazil. The Brazilian Central Bank continued its tightening policy and hiked the SELIC rate by 25 basis points in April to 11.00%.
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