Many countries in Latin America faced a harsh economic reality toward the end of 2015 and in the first half of 2016. The alarms went off earlier this year when commodities prices registered a renewed plunge in mid-January, which prompted capital outflows in the region, an episode of heightened volatility in Latin America’s foreign exchange markets and a deceleration of economic activity. Latin America’s economy had been contracting since the second half of 2015 and decreased further in the first quarter this year as Brazil, Ecuador, Uruguay and specially Venezuela, registered sharp GDP contractions, while nearly all of the rest of the economies in the region experienced a slowdown. A regional GDP aggregate showed that Latin America’s GDP contracted 1.1% annually in Q1 (Q4: -0.9% year-on-year), which marks the sharpest decrease since 2009, when the economy was gripped by the fallout from the global financial crisis.
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Commodities prices rebounded in the second quarter, but the gradual recovery was fraught with uncertainty. In that period, favorable global liquidity conditions remained in place as the world’s major central banks, led by the U.S. Federal Reserve, decided to maintain a relaxed monetary policy. Investors searching for a higher yield poured money into emerging markets, increasing capital inflows in the region and prompting regional currencies to stabilize as well as confidence to increase. Latin America’s economy continued to contract, but its GDP deterioration softened. According to preliminary data, it decreased 0.8% year-on-year in Q2.
The analysts we surveyed this month project that Latin America’s economy will continue to contract in the second half of the year, although at a slower rate. They forecast that the region’s GDP will decrease, on average, 0.3% in H2; that the mild improvement in economic conditions is the result of better prospects for commodities prices; and also that the overall economic climate is improving in most of the region. The quarterly economic climate indicator for Latin America (Indicador do Clima Econômico, ICE) published in August by the Brazilian research institute Fundação Getulio Vargas rose from 74 points in April to 79 points in July. Although the indicator remained below the 100-threshold that separates unfavorable from favorable economic conditions, it represented a third consecutive improvement on October’s 70-point low. The gain in the ICE was mainly the result of an increase in the expectations sub-component of the index—conditions over the next six months—in the majority of the 11 economies surveyed, particularly in Argentina, Brazil, Colombia, Paraguay and Peru. For Argentina and Brazil, the increase resulted from a transition to governments with sounder and more market-friendly economic policies. For Peru, it certainly reflected the continuation of a business-friendly administration, while for the rest of countries it showed the gradual pick up in prices for raw materials, particularly agricultural and metals commodities.
Region’s outlook stabilizes in September on improving economic conditions
External conditions remain favorable for many emerging economies: global interest rates are expected to remain low and China’s economy is stabilizing at a more sustainable growth rate. As shown previously, Latin America’s weak economic conditions are seen improving gradually on the back of a slow recovery in commodities prices and improving perceptions of the economic climate. The economic experts we surveyed this month left the region’s growth forecast unchanged over the previous month and expect GDP to decrease 0.5% this year.
The region’s stable outlook this month reflected that a cut to the growth forecast for 7 of the 11 economies surveyed in our LatinFocus report, including Argentina, Chile, Colombia, Mexico and Venezuela, compensated for a rise in the GDP growth prospects for Bolivia, Brazil, and Ecuador.Peru was the only economy for which analysts left their projection unchanged.
Next year, Latin America’s economy is expected to rebound and expand 2.0% against a backdrop of stronger global growth, higher commodities prices and still favorable global liquidity conditions. That said, significant vulnerabilities continue to cast a shadow on the outlook for 2017.
ARGENTINA | Economy undergoes painful adjustment
Argentina’s economy remains in a deep recession according to the latest economic indicators. June’s monthly economic indicator recorded the steepest annual drop since August 2014 due to low commodity prices and negative spillovers from President Mauricio Macri’s policies to cut the budget deficit. Moreover, exports contracted for the second consecutive month in July, mainly due to the recession in Brazil. Against this backdrop, in August, sentiment among households lost the ground gained in July. On a positive note, capital inflows and foreign reserves, which hit a 10-month high in July, have been boosted by a unified exchange rate market and the country’s return to the international credit markets after paying its holdout bondholders, which has in turn created a more reliable investment situation. Reform momentum suffered a setback on 18 August following the Supreme Court’s decision to nullify a hike in gas prices implemented in March, which was intended to slash utility subsidies.
While the new government’s austerity policies to stabilize the economy are hitting short-term growth, they should contribute to a rebound in 2017. Panelists project that GDP will contract 1.3% in 2016, which is down 0.1 percentage points from last month’s Consensus. For 2017, analysts expect the economy to expand 3.0%.
BRAZIL | The Olympic dream ends and so do Rousseff’s hopes
Brazil’s tattered economy improved in the second quarter, recording the smallest contraction in a year. The result came on the back of a less abysmal performance from the domestic economy, although broad-based declines were still recorded throughout. The economy appears to have picked up from rock bottom, but economic data is still poor. The unemployment rate hit a multi-year high in July and the current account—which had been a bright spot in Brazil’s economy—recorded a second consecutive deficit. On a positive note, political turbulence is likely to subside after Dilma Rousseff was impeached on 31 August. Michel Temer will fulfill the remainder of Rousseff’s term and the end of the impeachment trial should allow the government to turn its full attention to badly-needed economic reforms.
Greater political stability and an improvement in economic data is helping lift Brazil’s outlook. However, ongoing challenging political conditions, which could lead to slow reform implementation or watered down austerity measures, limit the country’s growth trajectory. FocusEconomics Consensus Forecast panelists expect that the economy will contract 3.2% this year, which is up 0.1 percentage points from last month's forecast. Next year, the panel expects GDP to rebound to a 1.0% expansion.
COLOMBIA | Government and FARC reach historic peace deal
On 24 August, after five decades of war, the government and the FARC finally agreed on a peace deal. The deal will need to be ratified first in a plebiscite on 2 October. A victory at the ballot box could provide President Juan Manuel Santos with political capital to push for an important tax reform to improve the government’s finances. Low oil prices have battered the economy and put pressure on the state’s fiscal accounts. GDP grew just 2.0% year-on-year in Q2, the weakest pace in over six years, due to subdued private consumption, a further contraction in investment and increased imports.
Our panel sees GDP growth slowing to a seven-year low this year due to expectations of a slowdown in total consumption in the wake of a tightening fiscal and monetary policy and persistent external headwinds related to subdued global growth. However, a ratified peace deal with the FARC and prospects of higher oil prices toward the end of this year are positive for the country’s outlook. Analysts expect the economy to grow 2.2% in 2016, which is down 0.1 percentage points from last month’s forecast. For 2017, the panel projects economic growth of 2.8%.
MEXICO | Government presents more austerity in 2017 budget
Newly appointed Finance Minister José Antonio Meade presented the 2017 draft budget to Congress on 8 September. The message is clear: the government is willing to cut spending as much as necessary to consolidate Mexico’s weak fiscal position. It has proposed reducing the fiscal deficit from an expected 2.9% of GDP this year to 2.4% of GDP in 2017 and targets a primary surplus of 0.4% of GDP. To do so, it envisages a significant decrease in public spending. While the markets welcomed the proposed budget, risks of political turmoil have increased following the sudden resignation of former Finance Minister Luis Videgaray. Videgaray’s resignation represents the most high-profile casualty of the recent visit by the Republican candidate for the U.S. presidency Donald Trump and leaves President Enrique Peña Nieto without his most trusted advisor.
Indications that economic activity will slow in the second half of the year and that it could be exacerbated by policy tightening—both fiscal and monetary—prompted analysts to lower Mexico’s growth outlook. Forecasters expect the economy to expand 2.1% this year, which is down 0.2 percentage points from last month’s forecast. Next year, the economy is projected to increase 2.5%.
INFLATION | Rapid increase in inflation forecast to accelerate
In a context of hyperinflation in Venezuela, inflation in the region continued to rise in July. A preliminary inflation estimate for the region calculated by FocusEconomics showed that it rose from 23.1% in July to 24.0%—the highest point since the mid-1990s.
High inflation is seen persisting this year and analysts project that inflation in the region will end 2016 at 29.2%. This month’s forecast was revised up from the 27.5% expected last month. Next year, forecasters expect inflation in the region to come in slightly lower at 23.1%.
Written by: Ricardo Aceves, Senior Economist