Latin America’s economy remained depressed in the first half of 2016 and weakness carried over into the second half. After having entered into recession in the final quarter of 2015, regional GDP contracted 1.2% annually in Q1 and fell further 1.0% in Q2. The latest economic data suggest that weakness persisted in the first few months of the second half and major regional currencies showed renewed instability at the end of Q3.
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The economic deterioration that persisted in the first half of the year reflected broad-based weakness across the region. Argentina, Brazil and Ecuador saw economic turbulence and each country’s GDP recorded a contraction in the second quarter. In Venezuela, available data suggest that the economy remains mired in a deep crisis and a dark cloud is looming over the country’s short-term outlook. Meanwhile, recent GDP data from across the continent show a deceleration in economic activity in Chile, Colombia and Peru. The only countries in which GDP growth gained momentum in Q2 were Mexico, Paraguay and Uruguay.
Latin America’s outlook remains stable
Heading into the final quarter of the year, the region’s growth outlook remained unchanged over last month. The stabilization in Latin America’s growth prospects mainly reflects that analysts think that economic conditions in Brazil and Ecuador are not quite as bad as they were in September. The group of economists that participated in this month’s LatinFocus Consensus Forecast expect regional economic growth to fall 0.5% this year and the economic outlook for 2017 continues to disappoint. Analysts cut the region’s 2017 GDP growth forecast by 0.1 percentage points and now expect it to grow 1.9%.
Looking at the countries in the region, economists cut the 2016 growth projections for Argentinaand Colombia, while they left the projections unchanged for six of the economies surveyed, including the region’s major players Brazil, Chile and Mexico. Meanwhile, Ecuador, Paraguay and Peru were the only economies for which the economic experts raised their forecasts.
ARGENTINA | Economic transition proves costly
The Argentine economy was in deep recession in Q2 after recording the third consecutive quarter-on-quarter decrease. GDP contracted 3.4% on an annual basis as a deceleration in private consumption, due to a decrease in real wages and a deterioration in the labor market, took a toll on growth. Q2’s sharp contraction shows that the recovery in Argentina might turn out to be slower than previously expected despite the emergence of green shoots in some sectors of the economy, particularly in the construction sector. The government has recently presented its 2017 draft budget to Congress. This aims at a gradual fiscal consolidation since, according to Minister of the Economy Alfonso Prat-Gay, any significant reduction of the fiscal deficit could threaten the already weak economy. The pace of fiscal consolidation will broadly depend on the evolution of the economy, the fiscal outcome of the tax amnesty and wage negotiations next year.
The slow adjustment of the economy to the government’s policies, the prolonged recession in Brazil and escalating public discontent against free market reforms are clouding this year’s outlook. Following Q2’s steep contraction, panelists cut their GDP projections for this year by 0.3 percentage points and they now expect the economy to contract 1.6%. Analysts expect the economy to rebound and expand 3.1% next year on the back of a rise in fiscal spending ahead of the mid-term elections and an increase in capital inflows
BRAZIL | Recession shows signs of abating in Q3
High frequency data suggest that Brazil’s deep recession continued to abate in Q3, after GDP recorded the smallest fall in one year in Q2. Confidence indicators have led the improvement in data: business confidence hit an over two-year high in September, while consumer confidence came in at the highest level since January 2015. However, depleted government finances remain a source of concern and tax revenues in August were the lowest in seven years for that month. On the political front, a reduction in political noise following Rousseff’s impeachment has led the government to turn its attention to much-needed reforms. It announced a privatization plan in September and presented a critical constitutional amendment to cap public spending to Congress in October. While these are steps in the right direction, a number of hurdles lie in the way of implementation. The constitutional amendment must pass by two-thirds in both houses of Congress and it remains to be seen if President Michel Temer can gather the support needed. Recent opinion polls show that Temer is facing an abysmal public approval rating of under 30%.
Brazil’s economy is expected to remain in a deep recession this year as austerity measures, tight credit conditions and high unemployment weigh on consumption. FocusEconomics Consensus Forecast panelists expect that the economy will drop 3.2% in 2016, which is unchanged from last month's projection. Next year, the panel expects GDP growth to rebound to a 1.0% expansion.
COLOMBIA | Unexpected “No” vote on peace agreement propels Colombia into unknown territory
On 2 October, in a close but surprising result, Colombians voted to reject the peace agreement between the government and the FARC. The result represents a political blow to President Juan Manuel Santos and it will probably undermine his ability to pass the long-awaited tax reform bill in Congress, which is designed to offset the shortfall in oil revenues. In other news, data for Q3 continued to suggest weak growth as a 45-day truckers’ strike prompted industrial production to shrink for the first time in 14 months in July. In addition, consumer confidence remained firmly entrenched in pessimistic territory in August.
While our panelists were already expecting growth to hit a seven-year low this year due to low oil prices and tepid global demand, the rejection of the peace agreement could further hurt the country’s outlook by raising political uncertainty. Analysts expect the economy to grow 2.1% in 2016, which is down 0.1 percentage points from last month’s forecast. For 2017, the panel projects economic growth of 2.7%.
MEXICO | Consumption maintains economic growth, but until when?
Aggregate demand data for Mexico’s Q2 GDP showed that the economy was extremely dependent on private consumption in the first half of the year. This suggests that any shock to household spending, such as rising inflation or a sharp weakening of the peso, could derail its healthy growth performance as it is unlikely that other GDP components will improve any time soon. The manufacturing sector showed signs of respite in September, and yet the country’s short-term growth prospects appear bleak as low oil prices and a weak peso persist. All eyes will be on the U.S. presidential election, where a Trump victory would almost certainly drive the economy into recession owing to the impact on the peso and on consumer and business confidence.
Although the risk of recession is still low, policies that could impair economic growth, such as interest rate increases and fiscal austerity, will prolong sluggishness in the economy. Forecasters expect the economy to expand 2.1% this year, which is unchanged from last month’s forecast. Next year, the economy is projected to increase 2.4%.
INFLATION | Upward trend in inflation remains in place
Data show that in September regional inflation continued the upward trend that began in April 2015. According to an inflation estimate elaborated by FocusEconomics, inflation in Latin America was 20.3% in September, which was slightly higher than the 19.7% recorded in August.
Inflation is projected to continue rising toward the end of the year and analysts expect it to end 2016 at 28.1%. This month’s forecast was revised down from the 29.2% expected last month. Next year, forecasters expect inflation in the region to come in at a lower 24.3%.
Written by: Ricardo Aceves, Senior Economist