Latin America Economic Outlook March 2019

Latin America: Economic Snapshot for Latin America

February 13, 2019

Growth projected to regain some steam in Q4; crisis-stricken Venezuela groans under oil sanctions

Latin America’s bumpy economic recovery is expected to have had a better quarter at the end of 2018, after growth slumped in the third quarter. FocusEconomics estimates that GDP increased 1.7% year-on-year in Q4, above Q3’s 1.5%. Despite the modest uptick, growth remains weak in the Latin American economy, which had a disappointing 2018 overall. Weaker global trade, a noisy election cycle, shifting sentiment for emerging-market assets and one-off shocks in major players caused the recovery to flounder last year.

Preliminary data for Mexico revealed that growth lost steam in the fourth quarter. Plunging industrial activity on the back of contractions in the construction and mining sectors dented economic activity, while retail trade figures were more positive. Official GDP figures for the rest of the region’s economies are still outstanding, although FocusEconomics analysts estimate that Ecuador and Uruguay both also lost steam in Q4. Moreover, Argentina’s recession is expected to have deepened as sky-high inflation, falling employment and decimated confidence undermined economic activity.

Elsewhere in the region, dynamics are expected to have held up better. A pick-up in Brazil’s economy likely fueled the overall regional acceleration, on the back of a recovering labor market and returning confidence. Peru’s economy is also projected to have bounced back from a poor Q3, thanks in part to soaring infrastructure spending, while growth in Chile is also seen having accelerated in Q4.

Growth is seen receding slightly at the start of 2019 and the Latin American economy is seen expanding 1.5% annually in Q1. Signs of a looser monetary policy stance in the United States are supporting sentiment for emerging-market currencies and should help give most central banks more room to encourage economic activity. In addition, the end of the crowded election cycle should allow governments to shift focus to implementing much-needed reforms, although a degree of uncertainty will likely linger until new policies are pushed through. Slower global growth, however, could take some wind out of the region’s external sector this year.

On the political front, Venezuela has been in the spotlight in recent weeks after the leader of the opposition-controlled National Assembly, Juan Guaidó, declared himself interim president on 23 January. Several countries, including the United States, have since recognized his presidency, ramping up international pressure on President Nicolas Maduro to resign or hold new elections. Moreover, the United States is using its economic might to squeeze the crisis-stricken country, imposing new sanctions on state-owned oil firm PDVSA. These measures will likely dent oil revenues and further exacerbate the country’s already dire economic condition.

The situation is fast-evolving and there is considerable uncertainty regarding the future of the country and whether Maduro will be able to cling onto power. Some of our panelists have begun forecasting a political transition, while there is also the risk that the recent actions by the United States could boost Maduro’s standing in the country.

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2019 GDP forecast cut amid challenging backdrop

Economic dynamics are seen improving somewhat this year, largely on the back of better performances in Argentina and Brazil. Argentina’s deep recession is seen mostly abating as the IMF’s cocktail begins to bear fruit, while the election of a reform-minded government has shored up sentiment in Brazil.

That said, the recovery appears on shaky ground. Weaker-than-expected economic reforms in Brazil could erode the newfound confidence, while political risks are high in Argentina ahead of the October general election. Moreover, geopolitical risk from a worsening trade relationship between China and the U.S. could threaten global growth, while shifting sentiment regarding emerging-market assets presents an upside or downside risk to the outlook.  

This month, regional growth prospects for Latin America’s economy were chopped a notch and GDP is now seen expanding 2.2% in 2019. Six of the region’s economies, including Argentina, Colombia and Mexico all had their growth outlooks cut. All other economies had their prospects left unchanged. Next year, GDP is seen growing 2.6%.

Given the current economic conditions in Venezuela and the limited availability of economic data, it has become extremely difficult to forecast the country’s economy. We have therefore removed Venezuela from the regional aggregates and discontinued its long-term forecasts.

Venezuela’s economic outlook has worsened amid heightened political tensions and the impact from the latest round of sanctions. The economy is expected to remain trapped in crisis, with GDP seen contracting for the sixth consecutive year in 2019. The possibility of a political transition has increased amid recent events, a scenario which some of our panelists have been factoring into their forecasts. FocusEconomics panelists see the economy contracting 10.3% in 2019, which is down 1.9 percentage points from last month’s forecast.

BRAZIL | Vale disaster dents export outlook for Q1

Brazil’s recovery is expected to have held up at the end of 2018 and at the start of the new year, although it remains a bumpy ride. The unemployment rate dropped in the fourth quarter and retail sales rebounded in November, pointing to a pick-up in household spending. In addition, economic sentiment continued its upward trend in January, while the manufacturing PMI also edged up in the same month. However, the recovery faced another unexpected shock in January, when an inactive dam owned by Brazil’s largest mining company, Vale, collapsed. The disaster resulted in Vale declaring a force majeure on some contracts and cuts in production, which will likely dent exports growth in the first quarter. That said, the shock should only have a short-term impact on growth. On a brighter note, the lower house elected pro-reform Rodrigo Maia as speaker on 2 February, which should aid the passing of tough reform bills for new President Jair Bolsonaro.  

Recovering confidence, accommodative monetary policy and falling unemployment are seen kicking the recovery into a higher gear in 2019. Downside risks to the outlook have moderated somewhat in recent weeks with the U.S. Federal Reserve now seen tightening rates at a more moderate pace this year, which should bode favorably for Brazilian assets. Swift implementation of substantial reforms remains pivotal, however. FocusEconomics panelists see GDP growing 2.4% in 2019, which is unchanged from last month’s forecast, and 2.5% in 2020.

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MEXICO | Growth slides at the end of 2018

Preliminary GDP figures revealed that growth slid sharply in the final quarter of 2018, weighed on by a contraction in the industrial sector. Slumping construction activity and plunging mining output drove the downturn, while services growth held up relatively well. Although a breakdown by expenditure is not yet available for the quarter, the external sector is likely to have been hurt by more tepid demand, while domestic policy uncertainty likely continued to bruise business sentiment and contain investment. Meanwhile, available data for the start of the year is mixed. The manufacturing PMI edged up in January but continued to point to contraction in the industrial sector, while consumer confidence jumped in the same month. In addition, widespread reports of gasoline shortages at the start of the year likely hampered activity in January. The shortages came after the government closed several gas pipelines to combat gasoline theft, which is a priority for new president Andrés Manuel López Obrador.    

FocusEconomics analysts chopped Mexico’s growth outlook this month and now see GDP expanding 1.9% in 2019, down 0.1 percentage points from last month’s forecast and a touch below last year’s 2.0% increase. A deceleration in the U.S. economy will reduce demand for Mexican exports while continued uncertainty over the new government’s policy and the ratification of the USMCA also dampen the outlook. Next year, growth is seen edging up slightly to 2.0%.

ARGENTINA | Government surpasses primary surplus targets despite economic malaise

The economy appears to have remained stuck in recession in the fourth quarter. This follows a second consecutive GDP contraction in the third quarter, which was triggered by plunging domestic demand on the back of sky-high inflation and interest rates, and a sharp fall of the peso. The decline in economic activity intensified in November, due to faster contractions in most economic sectors, and industrial production shrunk markedly throughout Q4. Turning to the first quarter of this year, January’s drop in consumer confidence points to protracted weakness in spending. At the same time, macroeconomic adjustments continue. The trade balance recorded a fourth consecutive surplus in December thanks to surging exports and plunging imports. Moreover, recently released data shows that the country outperformed its 2.7% primary-deficit-to-GDP ratio which had been outlined as a target by the IMF in 2018, while it also reduced its fiscal deficit from 6.0% of GDP in 2017 to 5.2% of GDP.

The economy should gradually begin to recover this year. A slow but steady moderation in both inflation and interest rates should support consumer spending and fixed investment, which will nevertheless suffer from still-tight financing conditions and higher taxes. Growing agricultural production will boost exports and limit the scope of the contraction. Political uncertainty ahead of October’s elections continue to cloud the outlook. LatinFocus Consensus Forecast analysts see the economy contracting 1.0% in 2019, down 0.1 percentage points from last month’s estimate, and expanding 2.5% in 2020.

COLOMBIA | Pension reform postponed as Duque’s popularity wanes

The economy appears to have picked up last year, thanks to a turnaround in the oil sector. On the demand side, private consumption accelerated on reduced inflationary pressures in the first three quarters, but a marked deterioration in consumer confidence in Q4 signals household spending cooled in the quarter. This is likely due to the recently-approved tax reform bill, which will raise personal income taxes for high-income earners. That said, a weak construction sector and the government’s fiscal consolidation drive restrained growth in overall economic activity. In other news, amid dwindling popularity for President Iván Duque, the government announced that planned reform to the pension system, with the overall aim of reducing social security spending, would not be implemented this year. Instead, more time will be spent assessing its likely impacts.

Momentum should strengthen in 2019, primarily thanks to a marked upturn in fixed investment. In a bid to boost foreign investment in crude and gas production, the country is set to award oil contracts for the first time in four years. The tighter labor market should also propel private consumption. Measures underway to improve the fiscal account, however, will likely restrain the pace of expansion. Risks to the outlook stem from lower oil prices and less favorable global financial conditions. FocusEconomics panelists expect GDP to grow 3.1% in 2019, which is down 0.1 percentage points from last month’s forecast, and 3.2% in 2020.

MONETARY SECTOR | Inflation drops at start of 2019

A preliminary estimate revealed that regional inflation fell to 7.5% in January, notably below December’s 7.8%. Lower prices pressures from energy products largely drove the downturn as the impact of higher oil prices peters out.

Receding inflationary pressures allowed most central banks to remain on hold at the start of 2019. Policymakers in Brazil, Colombia, Mexico and Peru all made no changes to their main policy rates. Chile’s Central Bank defied the regional trend, hiking its policy rate at the end of January as upbeat domestic activity reduced the need for monetary stimulus.

Regional inflation is seen moderating this year on the back of the fading impact of higher oil prices and tamer inflationary pressures in Argentina. Inflation is seen ending 2019 at 5.9%, which is up 0.1 percentage points from last month’s forecast. In 2020, inflation is seen falling further to 5.1% by year-end. 

Venezuela, which is not included in the regional aggregate, is suffering from severe hyperinflation due to exchange rate misalignments and basic goods shortages—and is thus not included in the regional aggregate. Despite last year’s currency overhaul and authorities’ pledges to scale back monetary financing, the measures have been unable to tame hyperinflation. Our panel sees inflation surging to over 100,000,000% by the end of 2019.

See the Full FocusEconomics Latin America Report


Angela Bouzanis

Senior Economist 

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