Latin America: Region is expected to have returned to growth in Q1
April 12, 2017
Uncertainty related to the potential course of U.S. trade policy and to a more challenging external scenario for Latin America has receded somewhat in the past month. Indeed, the perception of a coordinated global growth pickup seems to have gained momentum at the outset of this year. In line with a synchronized recovery in most emerging economies, the signs of recovery that began to show at the beginning of the year have also strengthened in Latin America. Our preliminary Consensus estimate suggests that the aggregate GDP for the region increased 0.2% year-on-year in Q1 2017, which, if confirmed, will mark a return to growth in Latin America, following five consecutive quarters of contraction.
Against a backdrop of receding external woes, our estimate contemplates a moderate improvement in GDP growth across the region, although short-term risks persist. Supported by high frequency data, the contraction in the economies of southern countries such as Argentina and Brazil is expected to have softened in Q1. Meanwhile, in the Andean countries severe weather conditions have posed a short-term challenge, which represents a downward risk to growth in Peru, while economic activity in Chile and Colombia is still tepid. In Chile, a sharp GDP deceleration in Q4 2016 and a strike at La Escondida copper mine earlier this year probably pushed the economy into a lower gear in Q1. After a disappointing 2016, Colombia’s economy is seen having gained gradual momentum in the first quarter, albeit still restrained by a persistent slowdown in household spending. On the flip side, Colombia’s government infrastructure spending plan will provide a boost to growth later this year. Meanwhile, in Mexico concerns about the potential impact on the economy from U.S. trade and immigration policies have lessened in the past month and recent data point to the economy’s resilience. However, sluggish growth in government consumption and still-low investor and consumer confidence represent a downside risk to the country’s short-term outlook.
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After a turbulent start to the year, the main regional currencies have stabilized as appetite for more risky assets has increased and the exchange rates in Latin America have benefited from a more supportive external environment. The strongest case is the Mexican peso, which has received relief and support from the Central Bank’s intervention program, together with less astringent comments from the U.S. government on upcoming NAFTA negotiations. In Brazil, capital flows have been highly supportive for the real and the Brazilian Central Bank has taken the opportunity to continue unwinding its foreign exchange swap positions, which at the moment stand at USD 18 billion. That said, activity in Congress related to the discussion of the widely-expected social security reform has the potential to cause some volatility in the coming months. For the rest of the currencies, some weakening pressure is expected, should the Federal Reserve increase interest rates more rapidly than expected in the wake of stronger U.S. economic growth.
Region to emerge from recession and yet growth will disappoint
The economy of Latin America contracted 0.7% in 2016, marking the worst economic performance since the region was hard hit by the global financial crisis in 2009. However, Brazil’s emergence from a deep and protracted recession and an economic rebound in Argentina will help to lift the regional growth rate back into positive territory in 2017. That said, regional growth is expected to continue to disappoint as the two largest economies continue to struggle. Analysts polled this month by FocusEconomics expect growth of just 0.5% for Brazil and 1.6% for Mexico in 2017, which will limit Latin America’s growth outlook for this year. Economists project that the region’s GDP growth will pick up to 1.5% in 2017, which was left unchanged from last month’s forecast. Next year, the economy of Latin America is expected to expand a stronger 2.5%.
Although social and economic ties between the U.S. and most Latin American economies will remain strong, the risk of increased tension and a deterioration in relations under the Trump government will remain high. The policies pursued by the U.S. president in areas such as trade and immigration will have an important bearing, particularly in Mexico, although current developments suggest that Donald Trump is not likely to follow through on some of his more radical campaign pledges, and the renegotiation of NAFTA that he announced after being sworn is likely to lead to adjustments to the agreement rather that its total termination.
Economists that participated in this month’s LatinFocus Consensus Forecast cut the forecasts for 8 of the 11 economies surveyed in this report, including Argentina and Brazil. Mexico and Uruguay were the only countries for which the economic outlook improved from last month’s projection. Meanwhile, analysts maintained their growth prospects for Paraguay.
ARGENTINA | Data signals economy firming up
Argentina’s economy expanded in annual terms for the first time in almost a year in January, suggesting that activity is continuing to firm up, albeit at an uneven pace. Comprehensive data for Q4 GDP point to an increase in export volumes as the main driver behind the improved momentum, with the domestic economy stuck in the doldrums. President Macri’s reform-oriented agenda and sky-rocketing inflation have dented household purchasing power, while a hoped-for rebound in fixed investment on the heels of an improved policy framework and increased credibility has failed to materialize so far. The government’s economic policymaking, however, has earned praise from credit rating agencies, with S&P Global Ratings upgrading Argentina’s sovereign bond rating to B from B- on 4 April, noting a strengthening in policy predictability and accountability. At the same time, discontent continues to mount among citizens, the latest salvo being the staging of a general strike on 6 April.
The economy is expected to rebound this year as last year’s policy changes start to feed through. Households will benefit from higher economic activity and decelerating inflation, fixed investment will gather steam on the back of improved business sentiment, and government consumption will rebound ahead of October’s mid-term election. Analysts foresee the economy expanding 2.8% this year, which is down 0.1 percentage points from last month’s estimate, and 3.0% in 2018.
BRAZIL | Government pursues social security reform amid improving economic climate
Monthly data is suggesting that the economy has turned a corner, after GDP contracted sharply in 2016. The manufacturing PMI recorded the best result in over two years in March and both business and consumer confidence rested at multi-year highs. In addition, the country logged a record USD 7.1 billion trade surplus in March, aided by strengthening commodity prices. However, dynamics are still weak, highlighted by a worsening in the labor market in February. On the political front, after a successful 2016, the Temer administration’s ambitious pension overhaul is facing significant opposition in congress. The government announced it will unveil a slimmed down version of the reform on 18 April, after surveys showed that the reform had very little congressional support ahead of general elections in 2018. Brazil has one of the world’s most generous pension systems and reform is vital to put public finances on a more sustainable path.
The economy should begin to recover from the worst recession in modern history this year on the back of lower inflation, improved confidence and less-tight monetary policy. However, growth will be marginal overall and analysts see GDP expanding a meagre 0.5% in 2017, which is down 0.1 percentage points from last month’s forecast. The recovery is seen gaining speed in 2018 and GDP should increase 2.4%.
COLOMBIA | Fiscal consolidation efforts start to pay off
While Q1 figures suggest growth does not yet seem to have recovered from a disappointing 2016, 2017 overall is widely expected to be kinder to Colombia’s economy and fiscal accounts. Higher oil prices, an ambitious public infrastructure program and loose monetary policy will allow growth to pick up this year. Similarly, the government should be able to meet its fiscal target for 2017 largely due to the tax reform passed in December and also to stronger economic activity. In fact, in a nod to Colombia’s fiscal consolidation efforts, ratings agency Fitch revised up Colombia’s sovereign rating outlook on 10 March. The political situation is also bound to improve following the signing of the historic peace deal last year, which could potentially bolster tourism and investment in the conflict-ridden areas of the country.
GDP growth will experience a modest acceleration in 2017 on the back of accommodative monetary policy and higher commodity prices. Analysts expect the economy to grow 2.3% in 2017, which is down 0.1 percentage points from last month’s forecast. For 2018, our panel projects economic growth of 3.0%.
MEXICO | Uncertainty lessens and economic activity is resilient
Although policy uncertainty in the U.S. caused consumer and investment sentiment to deteriorate markedly at the beginning of this year, Mexico’s economic activity has shown more resilience than initially expected. In January, the monthly proxy GDP (IGAE) accelerated to a 3.0% expansion, buoyed by solid growth in agriculture and services. In addition, the weakness of the peso, along with the ongoing improvement in global demand, has had a welcome effect on Mexico’s external sector, boosting merchandise exports in the first two months of the year. In other positive news, U.S. trade rhetoric toward Mexico has substantially moderated in the past weeks, alleviating concerns of a potential imposition of trade tariffs by the U.S. government on Mexican exports. Moreover, a record transfer of excess funds from the Central Bank to the government bodes well for strengthening public finances and the government’s fiscal consolidation efforts going forward.
This month, the GDP growth Consensus Forecast for 2017 was revised up by 0.1 percentage points compared to last month, reflecting the positive developments observed in Q1. Nonetheless, the outlook continues to be threatened by any potential swift change in U.S. policy. Analysts expect GDP to expand 1.6% in 2017 and to accelerate to a 2.1% expansion in 2018.
MONETARY SECTOR | Slowing inflation continues in Latam ex-Venezuela
A turnaround in inflation in the region—without considering the current period of hyperinflation in Venezuela—has favored a gradual re-anchoring of inflation expectations across Latin America. This has not been without challenges for central banks, especially those that plan to embark on an easing monetary cycle. Our regional estimate shows that Latin America’s inflation (ex-Venezuela) stabilized at February’s 7.8%. Inflation in the region has remained extraordinarily low in the past months, reflecting quite homogenous price developments across the region. The exception is Mexico, where a hike in gasoline prices at the beginning of the year and the pass-through effect from a weak peso on consumer prices is currently fueling inflation to its highest level since July 2009.
Venezuela is experiencing an episode of near hyperinflation and, considering its effects, inflation in Latin America is projected to end this year at 33.0%. Excluding Venezuela, Latin America’s inflation is expected to fall to 6.5% this year. Going forward, analysts project regional inflation excluding Venezuela to fall further to 5.3% in 2018 (28.2% including Venezuela).
Written by: Ricardo Aceves, Senior Economist