Latin America: Economic Snapshot for Latin America
March 7, 2018
Latin America: Economic recovery appears set to regain momentum in Q1
Recent data for Latin America signals that economic activity in the region ended 2017 on a weaker footing than previously thought. An estimate shows that the Latin American economies expanded an aggregated 1.9% annually in Q4. While the print was above Q3’s 1.6% expansion, it was well below the 2.1% preliminary estimate expected last month. The downward adjustment mostly reflected weaker-than-expected growth in Brazil, Colombia and Peru, along with a downgrade to Mexico’s GDP data for Q4.
Despite coming in lower than expected, growth in Brazil jumped in Q4, propelled by improved domestic dynamics. Lower inflation is allowing Brazilians to increase spending, and private consumption is also benefiting from a tighter job market. Moreover, strong demand for Brazilian goods, especially commodities, continued to fuel economic activity. That said, the rise in exports was jeopardized by soaring imports. While robust import growth underlines the improving strength of domestic demand, it threatens to worsen the country’s external imbalances. In the political arena, Brazil is gearing up for the key October presidential election, with high uncertainty about who will take the country’s helm. Moreover, President Michel Temer pushed back the long-awaited pension reform in mid-February. The crucial but unpopular reform will now have to be tackled by the upcoming government, casting a long shadow on Brazil’s long-term fiscal sustainability.
In Colombia, higher inflation and uncertainty about the outcome of the May presidential election prompted consumers to moderate their spending, dragging on overall economic growth in Q4. Moreover, the government’s efforts to bring down its budget deficit also hit GDP growth. On 11 March, Colombians voted in the first legislative elections in which the FARC, the former guerrilla group, took part. While the FARC performed poorly, the vote delivered a fragmented parliament, with right-wing parties gaining strength but failing to win an outright majority. The legislative election was largely seen as a test for the upcoming 27 May presidential election, and the outcome increases the chances that Iván Duque, of the Democratic Center party, which is led by former president Álvaro Uribe, will win the election.
In Peru, economic activity was dragged down by a worsening external sector due to lower shipments for copper and marine products in Q4. Moreover, the external sector’s contribution deteriorated further due to strong import growth, reflecting healthy dynamics in private investment. Reconstruction efforts following the devastating effects of the Coastal El Niño also buttressed economic activity.
Recent economic activity indicators for the region suggest that growth is strengthening across Latin America at the outset of the year, although some weaknesses remain, most notably in Argentina. That said, uncertainty related to NAFTA negotiations and fears of a trade war among key global economies following the United States’ introduction of tariffs on steel and aluminium are exerting downward pressure on investor confidence. Against this backdrop, our panel of analysts forecast annual growth of 2.1% in Q1 2018.
Political noise and economic imbalances threaten economic outlook
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Latin America is set to continue its patchy economic recovery this year as the region benefits from strong global growth; higher prices for key commodities, including agricultural commodities; and loose monetary policies as inflation remains low in most countries. On the flip side, stronger economic activity is propelling import growth following years of restraint, adding pressure on current account balances. Despite improved economic activity, most governments in the region still face large budget deficits, which threaten to derail the ongoing growth momentum. While large fiscal deficits prevent governments from stimulating their economies, attempts to rein in fiscal imbalances could spur social discontent. Some governments in the region are therefore refraining from implementing crucial measures to keep their budgets in check as elections loom. The LatinFocus Consensus Forecast for the region was stable this month, and analysts see regional GDP growing 2.3% in 2018. In 2019, growth is seen rising modestly to 2.7%.
This month’s outlook for the region is due to unchanged growth prospects for 6 of the 11 economies in Latin America remaining stable, including regional heavyweights Brazil and Mexico. The forecasts for Bolivia, Chile and Paraguay received upgrades this month, while economic estimates for Argentina and Venezuela were downgraded.
Bolivia and Paraguay are expected to be the region’s top performers this year, with economic growth of 3.9%. At the other end of the spectrum, Venezuela is seen contracting 7.7%. The country is in the midst of a severe crisis due to a scarcity of hard currency, falling oil production and hyperinflation.
BRAZIL | Mounting fiscal imbalances trigger credit rating downgrade
Growth accelerated notably in the last quarter of 2017, although it fell short of market expectations. It was led by strengthening household spending on the back of falling unemployment and low inflation, and a turnaround in fixed investment. According to available indicators, the positive economic momentum seems to have carried over into the first quarter of this year. In January, the current account deficit narrowed year-on-year. Moreover, in February business confidence moved into optimistic territory for the first time since mid-2013, and the manufacturing PMI rose on the back of solid domestic demand and job creation. However, in the same month, consumer confidence dipped, remaining deeply entrenched in pessimistic territory. The government’s decision to postpone the reform of the country’s generous pension system prompted Fitch Ratings to downgrade Brazil’s credit rating from BB to BB- in late February. Fitch, which also revised the outlook from stable to negative, cited the bulky government debt and troubled political environment as additional reasons for the downgrade.
Manageable inflation and improving labor market conditions should underpin consumer spending this year. A rebound in fixed investment is expected on the back of more favorable financing conditions due to monetary easing and rising business confidence. However, a market-unfriendly outcome from October’s elections poses the main downward risk to the outlook. FocusEconomics panelists see the economy growing 2.5% in 2018, unchanged from last month’s forecast, and 2.7% in 2019.
MEXICO | Political noise could derail nascent economic recovery
The economy grew less than initially reported in the final quarter of last year, with a second estimate showing the weakest year-on-year expansion in GDP in four years. High-frequency investment data suggests that subdued capital outlays continued to weigh on the economy’s performance, while strong service activity growth points to household spending as the main contributor to growth in Q4, despite high inflation, tight monetary conditions and slower credit growth. Leading indicators for this quarter signal a moderate turnaround: The manufacturing PMI and trade data were relatively positive early in the year, while the unemployment rate remained near one-decade lows in January. Meanwhile, Mexico will be temporarily exempt from U.S. tariffs on steel and aluminum imports set to take effect later this month. The exclusion is likely contingent on satisfactory NAFTA negotiations, with progress in the most recent round of talks—concluded in early March—slow and cumbersome.
Softer inflation and tight labor conditions should buttress private spending this year, while strong factory output in the United States is expected to remain supportive of manufacturing exports. Nonetheless, NAFTA talks and upcoming general elections set for July will continue hampering private investment, dragging on overall growth. The FocusEconomics panel expects 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 | Worsening twin deficits threaten economic recovery
Recent data suggests that the economic recovery has stumbled. While data from the real sector is positive, with economic activity expanding in December and industrial production rebounding in January, there is growing evidence that imbalances are building. In January, a surge in capital goods imports caused the trade deficit to widen further, and the fiscal deficit grew considerably on increased interest payments. Prospects of growing current account and fiscal deficits are worrying, as they could derail ongoing efforts by President Macri to reform the economy. These two deficits, together with untamed inflation, pose a major immediate challenge to the government. Salary negotiations between the government and labor unions are currently underway, and demands to equate salary increases to rises in the inflation rate would inevitably increase fiscal spending and keep the budget deficit elevated, forcing the government to continue seeking external financing.
The economy is expected to grow at a solid pace this year and next thanks to resillient growth in fixed investment and private consumption. However, a weaker currency and high inflation will weigh on private consumption, whereas the growing twin deficits pose a major downside risk to growth. FocusEconomics panelists see the economy expanding 2.8% in 2018, which is down 0.2 percentage points from last month’s forecast. For 2019, growth is expected to reach 3.1%.
COLOMBIA | Uribe’s party makes strong gains in March legislative election
The economy lost traction for the fourth consecutive year in 2017, expanding at the weakest pace in eight years. Annual GDP growth lost momentum in the final quarter after picking up in the previous three quarters. Private consumption growth fell sharply from Q3 and was the primary factor behind the slower economic expansion in Q4. Higher inflation, along with sluggish growth in private credit, discouraged household spending. Prospects furthermore look fairly dim at the outset of 2018. While consumer confidence rose to the highest level in just over a year in January, it remained in pessimistic territory, and unemployment reached a two-year high in the month. In the legislative elections held on 11 March, voters turned to right-wing parties critical of the peace deal brokered with FARC rebels. Ex-President Álvaro Uribe’s conservative Democratic Party won the most seats in parliament. Meanwhile, FARC—the former guerilla movement turned political party—failed to garner support for its radical agenda and will only hold the 10 seats guaranteed under the 2016 peace agreement.
The economic recovery should pick up pace this year as domestic demand improves. An upturn in private consumption growth is expected against an anticipated decline in inflation. Growth in fixed investment should also accelerate amid more favorable financing conditions. Diversifying the economic structure and boosting productivity in the lackluster non-oil sector will, however, be crucial to achieving sustainable growth. FocusEconomics panelists expect GDP growth of 2.6% in 2018, which is unchanged from last month’s forecast, and 3.0% in 2019.
MONETARY SECTOR | Regional inflation declines to seven-month low in February
A preliminary estimate for inflation, without considering the current period of hyperinflation in Venezuela, showed that price pressures are gradually abating in Latin America. The FocusEconomics regional estimate revealed that inflation in Latin America (excluding Venezuela) was 5.6% in February, just below January’s 5.7% and the lowest print since June 2017. February’s moderation in inflation reflected lower price pressures nearly across the board, with Colombia and Paraguay leading the pack. Conversely, inflation accelerated in Uruguay.
Subdued inflationary pressures are giving central banks in the region leeway to implement accommodative monetary policies. Against this backdrop, the Central Bank of Peru decided to cut its key rate on 8 March to levels last seen in 2010. This rate cut followed similar moves in Brazil and Colombia earlier in 2018.
Regional inflation excluding Venezuela is seen moderating slightly this year, coming in at 5.5% at the end of 2018. The forecast was cut a notch this month due to lower price projections for Bolivia and Brazil. Price pressures are expected to be stronger in Argentina this month, while the other economies in the region saw their inflation forecasts unchanged. In 2019, inflation is seen ending the year at 4.8%. Venezuela is experiencing an episode of hyperinflation; if we include it in the aggregate, inflation in Latin America is projected to end 2018 at 2,067% and 2019 at 55.8%.