Latin America: Economic Snapshot for Latin America
April 18, 2018
Bumpy recovery continues in Q1; Colombia and Paraguay elections expected to yield market-friendly outcomes
The Latin American economy’s recovery is expected to have remained on course in the last quarter of 2017 and first months of 2018 as the region puts a tough 2015–2016 firmly in the rearview mirror. A comprehensive estimate revealed that GDP grew 2.0% annually in Q4, which marked the fastest rate of growth since Q1 2014. Moreover, FocusEconomics estimates that GDP expanded 1.9% in the first quarter of 2018, broadly keeping pace. Higher commodities prices, solid global growth and accommodative financial conditions are expected to have supported growth in the region in Q1.
Newly released national accounts data for Argentina revealed that the economy gained steam in the final quarter of 2017, expanding at the fastest pace since Q2 2015. The domestic economy was the engine of growth as declining unemployment boosted household spending, and improving confidence caused investment to surge. Data for Chile showed that the economy ended the year with a bang, fueled by surging investment and healthy private consumption. Uruguay also saw growth pick up speed, amid rising private consumption. Meanwhile, freshly released data for Ecuador shows that growth decelerated in Q4, chiefly due to weaker government expansion. Expenditure-based GDP data for Mexico confirmed that the economy lost momentum as household incomes were eroded by high inflation and rising borrowing costs. In addition, investment continued to decline, weighed down by heightened political noise.
As the region’s economic dynamics continue to firm, the crowded political cycle is well underway, and recent developments have been largely positive for the economic outlook. In Colombia, legislative elections on 11 March yielded a victory for market-friendly right and center-right parties, boding well for economic policy going forward. A market-friendly legislature should help ensure the swift passage of economic reforms or act as a balancing act in the face of a non-market friendly president. Consistent with the outcome of the vote, Iván Duque of the Democratic Center party, who has campaigned on a business-friendly platform, is leading in the polls for the 27 May presidential vote.
Paraguay is also gearing up for elections, with a presidential and legislative vote set for 22 April. The front-runners have campaigned on largely market-friendly policies, and the verdict is unlikely to shake the economy from its steady growth path. Meanwhile, the front-runner in Brazil’s October vote, former President Luiz Inácio Lula da Silva was imprisoned at the beginning of April and has been barred from running. The presidential race in Brazil is now wide open, and at this stage it is difficult to predict if a reform-minded president will be elected.
Venezuela will head to the polls on 22 May, in what is widely regarded to be anything but a free and fair process, and the increasingly authoritarian regime is expected to ensure President Nicolás Maduro will be re-elected.
Growth set to firm in 2018
The economy of Latin America is expected to accelerate this year as the region benefits from a favorable external environment, higher commodities prices, low inflation and more accommodative monetary policies. While growth dynamics are stronger than in recent years, the recovery has so far been moderate, and spare capacity continues to linger in the region’s major players. Moreover, imbalances are wide, and high fiscal and external deficits threaten to derail the region’s growth momentum. This month, the LatinFocus Consensus Forecast for the region was unchanged, and regional GDP is seen growing 2.3% in 2018. In 2019, growth is seen rising to 2.8%.
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This month’s outlook for the region is due to stable growth forecasts for 5 of the 11 economies in Latin America, including regional heavyweights Brazil and Mexico. The forecasts for Argentina, Colombia, Peru, Uruguay and Venezuela were all downgraded this month. Despite recent gains made, Argentina’s outlook continues to be sober due to high inflation, a widening current account deficit and an elevated fiscal deficit. Moreover, a severe drought is expected to dent economic activity in H1. In contrast, Chile’s prospects were revised up, and growth is seen accelerating thanks to a turnaround in investment.
Bolivia and Paraguay are expected to be the fastest-growing economies in the region this year, with economic growth of 3.9%. At the other end of the spectrum, Venezuela is seen contracting a significant 8.9%. The country is in the midst of a severe economic and humanitarian crisis due to a scarcity of hard currency, goods shortages, falling oil production and hyperinflation.
BRAZIL | Presidential race blown open after Lula’s imprisonment
The economic recovery appears to be strengthening, after growth accelerated in the final quarter of 2017. Business and consumer confidence hit multi-year highs in March, and the manufacturing PMI rose further into expansionary territory in the same month. However, economic slack lingers, and the improvement is expected to be gradual. Retail sales dropped in February, and the rolling three-month unemployment rate rose as well. The focus has shifted to the October election, with the race wide open after the front-runner, former President Luiz Inácio Lula da Silva, was barred from running. Lula was jailed on 7 April after losing an appeal on a corruption conviction. The field is crowded with potential candidates, and a clearer view will emerge closer to August’s deadline for candidate nomination. The incoming president will need to focus on correcting government finances, including implanting the pension reform, to put the economy on a sounder footing and comply with the constitutionally-mandated spending cap. In a vote of confidence, on 9 April, Moody’s upgraded Brazil’s outlook from negative to stable, stating that it expects new policymakers to approve needed reforms.
Growth should gain traction throughout this year thanks to moderate inflation, lower interest rates and a recovering labor market. A market-friendly outcome from October’s elections, is, however, critical to supporting the economy’s outlook. FocusEconomics panelists see GDP growing 2.5% in 2018, unchanged from last month’s forecast, and 2.8% in 2019.
MEXICO | Activity appears to be on the upswing as presidential vote nears
The economy is gradually regaining traction following an anemic performance in H2 2017. In January, private consumption expanded at a five-month high in annual terms on the back of ebbing inflationary pressures and robust employment growth, while fixed investment rose at its second-highest rate in nearly two years. Likewise, healthy employment growth in February and a marked slowdown in inflation in Q1 should further lift private spending; double-digit capital import growth in the first two months of the year bodes well for capital outlays. A pick-up in investment and another round of successful bidding for multiple oil basins in the Gulf of Mexico are encouraging signs of economic resilience amid a busy political agenda dominated by ongoing NAFTA talks and looming general elections. Official campaigning began in earnest in early April, with left-of-center nationalist candidate López Obrador leading most polls by a double-digit margin.
Dwindling price pressures, firmer credit growth, tight labor conditions and robust remittances should support household consumption this year. Healthy factory output in the U.S. is also expected to buttress manufacturing exports, while incipient signs of a potentially successful renegotiation of NAFTA should benefit fixed investment. FocusEconomics panelists expect growth of 2.2% in 2018, which is unchanged from last month’s estimate. For 2019, analysts see growth accelerating slightly to 2.3%.
ARGENTINA | Drought and inflation temper economic outlook
GDP growth in annual terms accelerated to a multi-year high in Q4 2017. The expansion came in above market estimates and underscores a domestic economy that is showing signs of recovery, with declining unemployment and robust industrial production. More recent data is positive, suggesting the growth momentum carried over into the first quarter of this year. Economic activity accelerated markedly in January, and industrial output surged in February. However, this positive data contrasts with figures from the external and monetary sectors. The trade balance recorded its fourteenth consecutive month of deficit in February, and a devastating drought in parts of the country throughout Argentina’s summer months will hit export-oriented industries. Inflation in Q1 furthermore remained untamed, implying that the external debt burden will continue to grow in the coming months to keep up with elevated public spending.
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The economy is expected to grow at a solid pace this year and next thanks to a sharp expansion in fixed investment and still-strong private consumption. However, a weaker currency and high inflation will weigh on private consumption growth. FocusEconomics panelists see the economy expanding 2.6% in 2018, which is down 0.2 percentage points from last month’s forecast. For 2019, growth is expected to reach 3.2%.
COLOMBIA | Duque takes lead in presidential election polls
In 2017, the economy grew at the slowest pace in eight years owing to persistently weak domestic demand. Available data, however, points to a revival in growth at the start of the year, suggesting a turning point for the economy. Retail sales accelerated sharply in January, expanding more than 10-fold in annual terms from December. Moderating inflation, which fell to within the Central Bank’s target range for the first time in January 2018 since September 2017 and dropped to the lowest level in three and a half years in March, has bolstered consumers’ purchasing power, translating into a turnaround for the retail sector. However, a loss of confidence among consumers in February suggests growth in private consumption weakened slightly in the month. Moreover, exports picked up mildly in January but lost considerable ground in February. Primary run-offs for the upcoming presidential election confirmed Iván Duque, from ex-President Álvaro Uribe’s Centro Democrático party, as the main contender on the right, and Gustavo Petro on the left. Duque is currently leading in the polls.
The economy should enter the recovery phase this year, thanks to stronger domestic demand and an upturn in crude oil prices. Moreover, increased oil exploration activities should help boost growth in the medium-term. Dependence on oil, however, leaves the economy exposed to the same external shocks that induced a slowdown in 2015–2016. Investment in the non-oil sector will be crucial to attaining sustainable growth. FocusEconomics panelists expect GDP growth of 2.5% in 2018, which is down 0.1 percentage points from last month’s forecast, and 3.0% in 2019.
MONETARY SECTOR | Regional inflation drops to nearly five-year low in March
A preliminary estimate for inflation, without considering the current period of hyperinflation in Venezuela, revealed that price pressures dropped in March. FocusEconomics estimates that inflation in Latin America (excluding Venezuela) was 5.3% in March, below February’s 5.5% and the lowest print since February 2013. Lower price pressures were seen nearly across the board, with only Bolivia and Colombia recording higher inflation. Pass-through effects from past exchange rate appreciation, along with continued economic slack, is helping tame price pressures.
Low inflation has given central banks in the region room to cut interest rates, although a hiking cycle in the U.S. has caused some policymakers to pause their easing cycles. In recent weeks, policymakers in Colombia and Peru held rates unchanged, while the Central Bank of Brazil continued to cut rates. Meanwhile, Mexico’s Central Bank had been defying the regional trend and hiking rates in the face of stubbornly high inflation; however, it paused its hiking cycle in April as inflation has finally begun to fall.
Regional inflation excluding Venezuela is seen remaining moderate this year, coming in at 5.5% at the end of 2018, unchanged from last month’s projection. In 2019, inflation is seen ending the year at 4.9%. Venezuela is experiencing an episode of hyperinflation; if we include it in the aggregate, inflation in Latin America is projected to end 2018 at 1,799% and 2019 at 80.1%.