Uruguay Economic Forecast

After growing in Q1, the economy likely contracted year on year in Q2 on the back of double-digit interest rates and as a severe drought weighed on hydroelectrical generation, agricultural output and the food processing industry. The volume of agricultural exports plummeted 45% in annual terms in the quarter, with food-related manufacturing exports down 7%. More positively, inflation dipped notably in the quarter, which, together with strong wage growth, should have supported private consumption. Heading into Q3, GDP is expected to return to growth, thanks to rate cuts by the Central Bank, a further pullback in inflation, and the easing of the historic drought. Recent rains saw the water level at the Paso Severino dam, which supplies water to Montevideo, rise to close to 50% capacity in late August from single digits at end-Q2.

Inflation came in at 4.1% in August, which was down from July’s 4.8% and well within the Central Bank’s 3.0–6.0% target range. August’s figure marked the lowest inflation rate since September 2005. Inflation should remain within the Bank’s target range in H2 despite an expected slight uptick by year-end on monetary easing and higher oil prices.