Latin America: Latin America
July 7, 2018
Latin America’s recovery on weaker footing
Comprehensive national accounts data from across the region confirmed that Latin America’s recovery lost steam at the start of the year. Regional GDP increased a moderate 1.6% year-on-year in the first quarter, matching last month’s preliminary reading and marking a slowdown from the fourth quarter’s 2.0% expansion. Over half of the region’s economies—including major players Brazil and Mexico—lost steam in the period, although the downturn was also influenced by unfavorable calendar effects.
Freshly released GDP data for Argentina revealed that growth remained strong in the first quarter, albeit easing from the fourth quarter’s two-year high. Fixed investment expanded at a double-digit pace, buoyed by pro-market reforms and the government’s efforts to lure in foreign capital. Meanwhile, detailed figures for Mexico confirmed that growth slowed, dragged down by easing export growth. New national accounts data for Ecuador and Paraguay revealed that growth lost steam in the first quarter, while a softer contraction in investment caused Uruguay’s economy to defy the regional trend and gain momentum.
Despite the slowdown in the first quarter, regional growth managed to hold up well overall, supported by recovering household consumption and investment. However, Latin America’s growth outlook has notably weakened since the end of the first quarter amid tighter financial conditions, weaker currencies, severe market stress in Argentina and a truckers’ strike in Brazil. Higher interest rates and elevated inflation, along with fiscal consolation efforts, will dampen momentum in Argentina going forward, while the industrial action in Brazil caused widespread disruptions to economic activity in Q2, and a weak real is hurting the inflation outlook. The LatinFocus Consensus Forecast for the second quarter was chopped to a 1.7% expansion this month, down from 1.9% last month.
On the political front, recent votes in Colombia and Mexico went as predicted, with Ivan Duque clinching the Colombian presidency and left-wing presidential candidate Andrés Manuel López Obrador (AMLO) coming out on top in Mexico’s 1 July race. Duque should spell continuity for Colombia’s economic policy, and growth there is seen rising gradually, aided by higher oil prices. In Mexico, AMLO won a landslide victory, with his party also clinching a majority in both houses. Most analysts expect AMLO to avoid radical policy changes, and the odds of a disruptive presidency affecting growth therefore appear low. However, the country’s outlook is still littered with risks due to rising global protectionism and the uncertain outcome of NAFTA renegotiations.
Regional growth prospects chopped for third consecutive month
Latin America’s economic outlook for 2018 was revised down for a third month in a row this month, due to turbulence in regional heavyweights Argentina and Brazil. Argentina’s growth forecast was cut a notable 0.8 percentage points this month as the effects of a drought, fiscal austerity, high interest rates and elevated inflation combine into a perfect storm. The region’s largest economy, Brazil, also had its prospects downgraded as high oil prices, a weak real, political uncertainty and a nationwide truckers’ strike dent momentum. Regional GDP is now seen growing 1.8% this year, down 0.1 percentage points from last month’s forecast. In 2019, growth is seen rising to 2.5%.
On top of the downgrades to Argentina and Brazil’s forecasts, Ecuador, Uruguay and Venezuela also saw their 2018 prospects worsen this month. Shrinking agricultural output due to weather-related factors is weighing on Uruguay’s outlook, while Venezuela remains mired in a severe economic and humanitarian crisis. In contrast, Chile, Colombia and Mexico had their growth forecasts upgraded. Higher commodity prices are supporting the outlooks for Chile and Colombia, while Mexico is benefiting from a robust U.S. economy, although downside risks, particularly related to ongoing trade negotiations, persist.
The smaller economies of Bolivia and Paraguay are expected to grow at the fastest rate in the region this year, both expanding 4.0%. At the other end of the spectrum, Venezuela is seen contracting a massive 11.2% amid waning oil production, hyperinflation and basic goods shortages. Regarding the region’s largest economies, Mexico is seen growing the fastest (2.3%), followed by Brazil (1.9%) and then Argentina (0.9%).
BRAZIL | Downbeat data rolls in following transit strike
Economic data has taken a turn for the worse following a nationwide truckers’ strike in May and early June that crippled economic activity. Industrial production recorded the largest contraction in almost 10 years in May, and the manufacturing PMI plunged into contractionary territory in June. In addition, both business and consumer sentiment dropped in June, weighed on by the industrial action. All-in-all the strike and related spillover effects are expected to have dented GDP growth in the second quarter, following a slowdown in activity in the first quarter of the year. On the political front, October’s elections are coming into focus, and the lack of a strong centrist and reform-minded contender is casting a shadow on the country’s future and reverberating through financial markets. The Ibovespa index recorded its largest quarterly drop since 2015 in Q2, weighed down by political uncertainty as well as tightening global financial conditions. Early polls place far-right candidate Jair Bolsonero in the lead but show that former President Lula da Silva would be on top if he can contend.
Brazil’s growth forecast was downgraded sharply for a second consecutive month this publication in the wake of the truckers’ strike. In addition, a less supportive external environment due to tighter global financial conditions and higher oil prices is also weighing on the country’s outlook. FocusEconomics panelists cut 0.2 percentage points off Brazil’s growth forecast and now see the economy expanding 1.9% in 2018. Next year, GDP is seen growing 2.6%.
MEXICO | AMLO wins in a landslide as congress also shifts leftward
Andrés Manuel López Obrador (AMLO) won the 1 July presidential vote by a 30-point margin, comfortably securing a six-year term as president. The leftist’s landslide victory was widely expected and followed months of market volatility as investors anxiously priced in his policy proposals. A concerted push by AMLO’s campaign to calm investors appeared to work in the weeks running up to the ballot, however, as the peso began an earnest recovery. Moreover, the president-elect’s conciliatory post-election speech positioned him as a pragmatic centrist committed to fiscal responsibility—despite campaign pledges to boost social spending. Although AMLO is only set to take office in December, he appears poised to inherit an improving economy; consumer-spending metrics ticked higher in the second quarter. Meanwhile, industry-related metrics have improved somewhat in recent months on firmer manufacturing output.
Tight domestic and U.S. labor markets, as well as firmer credit growth, should support household spending this year. Moreover, healthy factory output in the U.S. should bolster manufacturing exports. Uncertainty over NAFTA continues to weigh heavily on the outlook, although its successful renegotiation would likely safeguard fixed investment. At this point, most analysts expect AMLO to tack his platform to the center somewhat. FocusEconomics analysts expect growth of 2.3% in 2018, up 0.1 percentage points from last month’s estimate. For 2019, analysts see growth stable at 2.3%.
ARGENTINA | Peso falls to new record low in June
On 20 June, the IMF and Argentina formalized a three-year USD 50 billion Stand-By Arrangement. The deal aims to shield the economy from financial turbulence as the government rebuilds economic buffers, stabilizes debt levels and substantially lowers fiscal spending. The agreement coincided with an upgrade to emerging market status by the MSCI index on the same day. The upgrade is expected to result in investment inflows of USD 4.5 billion into the economy and represents an important political victory for the government against a complicated economic panorama. The first batch of real data from the Q2 was weak, with industrial production declining in May and economic activity recording its first contraction in over a year in April. Similarly, Central Bank efforts to stem the currency’s slide have so far failed, and the peso set a new record low on 29 June over growing concerns that the government will struggle to comply with IMF terms as discontent in the country grows.
A devastating drought in the first quarter, fiscal austerity, record-high interest rates and constrained private consumption due to a weaker currency and low consumer confidence will cause economic growth in 2018 to decelerate sharply from 2017’s strong figure. Panelists participating in the LatinFocus Consensus Forecast foresee the economy expanding 0.9% in 2018, which is down 0.8 percentage points from last month’s forecast. For 2019, growth is expected to reach 2.1%.
COLOMBIA | Duque inherits an accelerating economy
Iván Duque of the right-wing Democratic Centre (Centro Democrático) clinched the presidency on 17 June in the second-round run-off against Gustavo Petro of the left-wing Colombia Humana movement (Humana Colombia), securing just over half of the ballot. Continuity on the economic front will be marked by Duque’s orthodox management, along with an ostensibly more pro-business stance. This includes a slash in corporate taxes, easing legal hurdles for foreign investors looking to enter the economy’s oil and mining sectors and cutting public spending. There will be little room for tax cuts, however, if he is to stick to the country’s existing fiscal rule and averting the imminent threat of credit rating downgrades. Notwithstanding the high debt-to-GDP ratio and the need for reforms, growth has picked up since the start of the year, thanks to strong exports aided by a weaker peso. At the outset of Q2, the industrial sector and car sales accelerated markedly in April, while retail sales expanded again at a healthy pace. Moreover, consumer confidence hit an almost two-year high in May.
An upturn in the oil sector, aided by higher oil prices and an increase in mining activities, along with more infrastructure projects, should boost growth this year. Moreover, the fading of political uncertainties should help lift economic sentiment. Duque’s intention to modify the existing peace agreement with FARC could raise uncertainties, however, while vulnerabilities continue to stem from a heavy reliance on commodity exports. FocusEconomics panelists expect GDP to grow 2.6% in 2018, which is up 0.1 percentage points from last month’s forecast, and 3.1% in 2019.
MONETARY SECTOR | Regional inflation jumps in June
A preliminary estimate for inflation, without considering the current period of hyperinflation in Venezuela, revealed that price pressures climbed in June. FocusEconomics estimates that inflation in Latin America (excluding Venezuela) was 5.7%, significantly above May’s 5.1%. A strong climb in price pressures in Brazil due to good shortages caused by the truckers’ strike drove the increase in regional inflation. In addition, higher oil prices across countries in the region are also causing inflationary pressures to build.
On top of higher energy prices, a sharp selloff in emerging-market assets in recent weeks hurt many of the region’s currencies and will likely lead to higher pass-through inflation in the coming months. In the face of weaker currencies, rising inflation and inflation expectations, Central Banks around Latin America made no changes to monetary policy in recent weeks. Mexico’s Central Bank was the exception, however, hiking the policy rate in June amid a freefall in the peso.
Regional inflation excluding Venezuela is seen rising by year-end, coming in at 6.3%. The forecast was revised up 0.2 percentage points from last month’s projection, largely due to notable upward revisions to Argentina and Brazil’s inflation projections in light of weaker currencies. In 2019, inflation is seen ending the year at 5.3%. Venezuela is experiencing an episode of hyperinflation and is not included in the aggregate.