Economic Snapshot for Latin America

January 16, 2019

Recovery slumps in third quarter; eyes turn to policy after election-filled 2018

Latin America’s economic recovery lost momentum in the third quarter of 2018, with growth decelerating for the third consecutive period. A comprehensive estimate revealed that regional GDP expanded 1.5% annually in Q3, below Q2’s 1.7% expansion and the slowest growth rate since Q2 2017. Tighter global financial conditions and a sharp shift in sentiment away from emerging markets hampered regional activity in the period, along with softening global trade. In addition, internal dynamics also played a role. Argentina’s economic adjustment, in particular, continued to drag on the Latin American economy, especially affecting its regional trading partners.

Argentina’s GDP plunged a notable 3.5% year-on-year in the third quarter, dragging on regional activity. However, the contraction was slightly softer than the fall observed in the second quarter. A weak domestic economy drove the poor result as the peso’s depreciation and subsidy cuts in public utilities hit households’ wallets. Elsewhere in the region, Uruguay’s economy lost steam as a poor soybean harvest and depressed demand from Argentina, a key trading partner, caused exports to plunge by over 10%. Chile and Peru also both saw their growth rates chopped in the quarter.

In contrast, the region’s largest economy, Brazil, gained steam as disruptions from the truckers’ strike faded and investment surged, partly due to government incentives in the quarter. Meanwhile, growth in Mexico was broadly stable in the third quarter as weaker domestic demand was largely counterbalanced by a buoyant external sector.       

Incoming data for the final quarter of 2018 suggest that regional growth strengthened somewhat, and Latin America’s economy is expected to have grown 1.6%. Recovering confidence and an improving labor market in Brazil should help kick its recovery into a higher gear, while Peru’s growth is expected to have nearly doubled thanks to a pick-up in investment.

On the political front, after a noisy election cycle in 2018, all eyes are on the region’s newly installed governments to see how they tackle their respective economic challenges. Mexico’s new President Andrés Manuel López Obrador has been particularly in the spotlight, after jittering investors in late October by cancelling a partially built USD 13 billion airport and due to concerns over his tax policies. The financial markets, however, responded positively to his first budget, which was released on 15 December. Of particular note, it promises a 1.0% of GDP primary fiscal surplus, which has helped to calm fears over the direction of economic policy.

In Brazil, market enthusiasm over the new government and reforms have notably boosted the real and the Brazilian stock market. The government will now need to swiftly push ahead with bold measures if it is to correct the government’s depleted coffers and maintain upbeat market sentiment. However, doubt remains over whether the new administration can aptly navigate the divided congress to push through the radical reform required.

Growth seen accelerating after disappointing 2018

The Latin American economy is expected to gain momentum this year, after a challenging 2018. A non-stop election cycle, shifting winds in global sentiment towards emerging-markets and trade flows, as well as one-off shocks in the region’s larger economies, are expected to have pushed regional growth down to 1.6% last year. This year, reduced political noise, an improving labor market and the fading of some of last year’s shocks, should cause growth to gain steam and hit 2.3%, which is unchanged from last month’s forecast. Next year, growth is seen edging up to 2.6%.

The majority of the region’s economies saw no changes to their 2019 growth forecasts this month, including Argentina after eight months of consecutive downgrades. Brazil was the only economy to see its prospects raised as low inflation and a stronger real bodes well private consumption and continued accommodative monetary policy. In addition, recovering confidence should also boost the domestic economy’s prospects. On the flipside, Ecuador, Mexico and Uruguay all had their forecasts cut.

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.

The country’s outlook is bleak, with GDP seen contracting for the sixth consecutive year in 2019. The economy is expected to continue to be crippled by runaway inflation, dwindling oil output and a dysfunctional exchange rate regime. Financial sanctions which hinder the country’s ability to access foreign credit and restructure debt only exacerbate the dire situation. Given the severity of the crisis, conditions may emerge for a political transition, a scenario that some of our panelists have been factoring into their forecasts. FocusEconomics panelists see the economy contracting 9.7% in 2019, which is down 1.3 percentage points from last month’s forecast.

BRAZIL | Waiting for reform details

Incoming data suggests Brazil’s economic recovery continued in the fourth quarter, after growth jumped in the third quarter. Returning confidence in the economy is expected to have buttressed momentum, with business and consumer sentiment edging up in December. In addition, the three-month rolling unemployment rate fell to an over two-year low in November, boding well for household consumption, and export growth accelerated in Q4. Jair Bolsonaro was sworn in as president on 1 January, taking the reins of Brazil’s economy. The government is expected to focus on cutting Brazil’s bloated fiscal accounts as its first major priority, with critical social security reform likely to be presented in the coming days. However, conflicting media statements by members of the government are generating confusion over how bold the measures will be. The country is expected to have recorded a sizable 7.1% of GDP fiscal deficit last year.  

Growth is seen gaining steam in 2019 as household spending and investment growth pick up pace. Recovering sentiment, accommodative monetary policy and a tightening labor market should buttress the domestic economy. The execution of market-friendly reforms remains critical to the recovery; if bold measures are not passed soon, sentiment and Brazil’s outlook could be dented. GDP is seen growing 2.4% in 2019, which is up 0.1 percentage points from last month’s forecast, and expanding 2.5% in 2020.

MEXICO | AMLO releases disciplined budget

Available fourth-quarter data points to a moderate cool-off as domestic demand appeared to hobble through year-end. Household spending looks to have been alone at the helm; real wages were on the rise and consumer confidence rode high, both despite elevated inflation. On the other hand, industrial-sector bellwethers have missed the mark in recent months. Along with the deterioration of activity within the pivotal manufacturing sector, these hint at subdued late-year fixed investment. All this follows a solid third-quarter outturn framed by export-driven gains but a slowdown domestically. Andrés Manuel López Obrador’s (AMLO) new government calmed investors’ concerns somewhat on 15 December when it unveiled this year’s budget. Markets responded positively to the restrained spending plans—and its primary fiscal surplus of 1.0% of GDP—and gave the leftist a sorely-needed first win. He initially sent financial markets into a tailspin by scrapping Mexico City’s partially-built airport (NAIM) in late October.

FocusEconomics analysts have been decidedly wait-and-see in recent weeks as the new government adjusts to power, forgiving AMLO’s late-2018 missteps as they hold out for new policy-signaling; they see growth at 2.0% this year, down 0.1 percentage points from last month’s forecast. That said, policy uncertainty surrounding the nascent presidency has financial markets on edge, and analysts are notably downbeat on fixed investment over the short-term. More broadly, however, buoyant household spending and a bustling stateside economy are expected to support growth in the coming years. Moreover, once ratified, the United States-Mexico-Canada Agreement should underpin exports over the long-term. Analysts see growth at 2.1% in 2020.

ARGENTINA | GDP plunges again in Q3; Government secures fresh funds

The economy contracted again in the third quarter, weighed down by plummeting domestic demand amid soaring inflation and interest rates, and a significant depreciation of the peso. Recession likely carried over into the fourth quarter, as suggested by shrinking economic activity in October and plunging industrial production in October−November. In more positive news, November saw the third consecutive trade surplus, while inflationary pressures moderated notably in October−November. Meanwhile, on 19 December the IMF completed the second review of the standby agreement and disbursed an additional USD 7.6 billion. While recognizing that weaker inflation and the peso’s stabilization are encouraging signs, the Fund urged the government to keep cutting energy subsidies and to limit public wage increases in order to keep public finances in check.

This year, the economy is expected to continue shrinking, although it will likely gradually exit recession. Strong inflationary pressures, rising taxes and tight financing conditions will likely hurt consumer spending and fixed investment. However, a strong rebound in agricultural output should help cushion the contraction. The uncertain result of October’s elections and a global slowdown are the main downside risks to the outlook. LatinFocus Consensus Forecast analysts see the economy contracting 0.9% in 2019, unchanged from last month’s estimate, and expanding 2.6% growth in 2020.

COLOMBIA | Economy expected to have ended 2018 on softer note

Available data suggests that the economy sustained a solid pace of expansion into the final quarter despite a sharp decline in oil prices. Retail sales grew robustly in October against a backdrop of weak inflation and falling unemployment, signaling stronger private consumption. Moreover, industrial production jumped in October and car sales also soared in the month. That said, consumer confidence tumbled to a 20-month low in November and the manufacturing PMI continued to decline throughout the quarter, indicating dimmer prospects. On 19 December, the deeply-divided Congress passed a much watered-down tax reform bill. Most notably, the original revenue has been halved, thus forcing a freeze on COP 6.2 trillion spending in efforts to fund the COP 7.8 trillion 2019 budget without sacrificing its fiscal goals.

Growth is expected to climb again in 2019 on an upturn in domestic demand and increased investment in the extractives sector. Private consumption growth should strengthen, thanks to a tighter labor market fueling wage gains. This, coupled with an acceleration in fixed investment, should counter the likely adverse impacts from government expenditure cuts. While fiscal tightening measures are helping to improve the country’s debt dynamics, slashing corporate taxes could present challenges in meeting the targets. FocusEconomics panelists expect GDP to grow 3.2% in 2019, which is unchanged from last month’s forecast, and 3.2% again in 2020.

MONETARY SECTOR | Inflation rises in 2018

A preliminary estimate revealed that regional inflation ended 2018 at 7.8%, notably above 2017’s 6.4%. Higher oil prices, weaker currencies and skyrocketing inflation in Argentina fueled inflation in the region last year.

Tightening interest rates in the U.S. and higher commodity prices prompted most of the region’s central banks to halt monetary easing, and in some cases to begin to unwind their accommodative stances. In recent weeks, Mexico’s Central Bank hiked rates to a decade-high 8.25% amid financial volatility due to concerns over AMLO. Meanwhile, the region’s other central banks stood pat, keeping conditions largely accommodative.

Regional inflation is seen receding somewhat this year, as the impact of higher oil prices fades, agricultural output strengthens and Argentina’s peso stabilizes. 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 5.0% by year-end.

Venezuela is suffering from severe hyperinflation due to exchange rate misalignments and basic goods shortages—and is thus not included in the regional aggregate. Despite the recent currency overhaul and authorities’ pledges to scale back monetary financing, analysts contend the measures are unlikely to tame hyperinflation. Our panel sees inflation surging to over 100,000,000% by the end of 2019, before falling to around 1,500,000% by the end of 2020.

See the Full FocusEconomics Latin America Report

Angela Bouzanis

Senior Economist