Latam to Resume Moderate Growth in 2017 but Important Risks Plague Outlook

The Latin American economy is expected to recover modestly in 2017, though the outlook is plagued with risks that are causing a downward bias in analysts’ growth forecasts, according to FocusEconomics’ latest survey of 150 leading economic institutions.

Economists forecast Latin America’s GDP to increase 1.6% in 2017, which has been revised down from the 1.8% projected last month. Economic data was stubbornly weak across the region in 2016 and growing uncertainty surrounding the global outlook in the aftermath of Donald Trump’s victory is weighing on sentiment, fueling concerns over the trajectory of the recovery in 2018.

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“The prospect that a Trump Presidency might be both protectionist and in favor of a substantial fiscal expansion has altered expectations for U.S. monetary policy. Therefore, weakness is looming on the horizon for several currencies in the region, raising risks of a further tightening of monetary policy across the board,” says Ricardo Aceves, Senior Analyst and Latin America expert at FocusEconomics.

Looking at the countries in the region, economists made sizeable cuts to the 2017 GDP growth forecasts for Brazil, Ecuador, Mexico and Venezuela, which together represent a big portion of the region’s economy. Paraguay was the only economy for which economists raised their forecasts. 

Country highlights:

BRAZIL: High unemployment, tight credit conditions, political turmoil and weak external demand kept Brazil’s economy in the worst recession in modern history last year. While signs of stabilization have emerged, activity is meagre and gains are uneven. After an expected 3.4% contraction in GDP last year, the economy should return to growth in 2017 but activity will be weak. Analysts see GDP growth at 0.6% in 2017, which is down 0.2% from last month’s forecast. The recovery is seen gaining speed in 2018 and GDP should increase 2.2%.

MEXICO: Mexico is by far the economy in Latin America most exposed to risks from the U.S., given the strongly integrated trade and manufacturing cycle links to its northern neighbor. At the same time, December’s fall in the manufacturing PMIs gives little hope of stronger GDP growth in Q4, following a slowdown in Q3. Adding to the bad news for the manufacturing sector, carmakers are feeling the pressure coming from Trump’s threats to impose tariffs on vehicles assembled in Mexico and exported to the U.S. 

With fears that Trump’s protectionist agenda will wreak havoc on Mexico’s economy, the outlook is becoming gloomier. Analysts expect the economy to decelerate to 1.8% growth in 2017, which is down 0.2% from last month’s projection, after an estimated 2.1% growth in 2016. For 2018, GDP is forecast to increase 2.3%.

COLOMBIA: In Q3, the Colombian economy recorded its worst performance since the height of the global financial crisis in 2009. The latest monthly data sent mixed signals of the economy in Q4, which suggests that the economy was still in bad shape at the close of 2016. Nevertheless, higher oil prices following the OPEC output freeze coupled with increased infrastructure spending should provide a boost to Colombia’s economy this year. Analysts expect the GDP growth of 2.4% in 2017, which is unchanged from last month’s forecast. For 2018, the FocusEconomics panel projects the economy to expand 3.1%.

ARGENTINA: Although Argentina will return to growth this year thanks to a combination of higher real wages, improved business sentiment and stronger regional growth, spillovers from the government’s tough economic reforms are casting doubts about how strong the economic recovery will be. Analysts foresee the economy expanding 3.0% this year, which is unchanged from last month’s estimate. Next year, the panel sees GDP growth at 3.1%.

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinion of FocusEconomics S.L.U. Views, forecasts or estimates are as of the date of the publication and are subject to change without notice. This report may provide addresses of, or contain hyperlinks to, other internet websites. FocusEconomics S.L.U. takes no responsibility for the contents of third party internet websites.

Date: January 18, 2017