Economic Snapshot for Latin America

May 15, 2019

Latin America growth prospects cut again in May on weak incoming Q1 data

Activity is seen remaining soft this year, picking up only slightly from a dismal 2018, and growth prospects were cut again this month on weak incoming Q1 data. A challenging external environment and political uncertainty are weighing on this year’s outlook. The modest uptick in growth will be driven by slightly stronger growth in Brazil and a smaller drag from Argentina. 

FocusEconomics analysts expect Latin America's economy to expand 1.9%, down 0.2 percentage points from last month's forecast. For 2020, the regional economy is projected to grow 2.5%.

Brazil Economic Outlook

The economy is expected to have disappointed again in the first quarter, after a feeble end to 2018. Economic activity, a GDP proxy, dropped in both January and February—raising the risk that GDP growth stumbled in Q1. Industrial output fell at the fastest pace in over two years, in part due to halts in iron ore production. More broadly, a less favorable external environment is also dampening activity and exports fell in Q1. Monthly data for Q2 is also soft: Consumer confidence and the manufacturing PMI slid in April. Against this backdrop, the government is under increasing pressure to move quickly with reforms. The critical pension reform made it through an initial first vote at the end of April; however, it still needs to clear multiple hurdles, including a special committee and votes in both houses of parliament. On 30 April, the government announced some minor measures aimed at reducing bureaucracy. 

Growth is seen staying tepid this year, plagued by a challenging environment both at home and abroad. While improved sentiment and accommodative monetary policy should help fuel a modest acceleration, reform uncertainty and subdued external demand will limit the uptick. An inflow of weak data led our panel to downgrade Brazil’s growth outlook for a third month in May. 

FocusEconomics analysts project growth of 1.8% this year, which is down 0.3 percentage points from last month’s forecast, and 2.4% in 2020.

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Mexico Economic Outlook

First-quarter growth fell short of market analysts’ expectations, on the heels of upbeat recent data for January and February. A supply-side breakdown of the first quarter confirmed softness in the industrial sector, which struggled—alongside its stateside counterpart—to find its footing through March. Moreover, output within the services sector slowed considerably despite strong wage growth and resilient consumer confidence. Nevertheless, Mexico’s economy is probably not as weak as preliminary national accounts suggest, given the difficulty of seasonally-adjusting for the Easter holiday. Moreover available second-quarter indicators hint at an upturn. Consumer confidence remained within reach of its all-time high in April, boding well for household spending. Survey-based indicators also suggest that manufacturing could be headed for a turnaround in April, which would boost investment and exports.

Policy uncertainty in light of the new left-leaning government and flagging oil-sector output are seen weighing on economic activity this year, but steady household spending should limit the downturn. Hold-ups to ratifying the USMCA, coupled with a possible slowdown in the U.S., also cloud the outlook, as does an oil and gas-starved fiscal deficit.

FocusEconomics analysts see growth at 1.7% this year, which is unchanged from last month’s forecast. Next year, analysts see growth at 1.9%.

Argentina Economic Outlook

The still-battered economy continues to wade through macroeconomic rebalancing, on the one hand, and stubbornly elevated inflation and political risk, on the other. Economic activity shrunk less sharply in January−February, although the size of the contraction was severe nevertheless. Inflation, however, showed little sign of improvement, soaring in Q1 amid persistent FX pass-through pressures. This prompted the government to launch a controversial plan in mid-April to control prices on a basket of over 60 essential products, and the Central Bank to tighten its FX strategy again. That said, macroeconomic rebalancing is underway: The trade balance was firmly in surplus in Q1 and the government reported a primary surplus of 0.1% of GDP in Q1, reversing last year’s deficit and beating its target of a primary balance of 0.0% of GDP. This should help secure the disbursement of an additional tranche of IMF funds at the end of the Fund’s ongoing review mission.

Mounting political uncertainty ahead of October's elections, skyscraping interest rates and painfully-high inflation are expected to depress investment and also hit consumer spending. However, rising agricultural output and a weaker peso should sustain exports, cushioning the downturn, while the twin deficits will be reduced.

LatinFocus Consensus Forecast analysts see the economy contracting 1.3% in 2019, which is down 0.2 percentage points from last month’s estimate, before expanding 2.2% in 2020.

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Colombia Economic Outlook

The economy seems to have kept pace in the first quarter. Household spending likely remained resilient despite a surge in unemployment: Retail sales growth accelerated, on average, in January–February, while consumers were markedly more optimistic in the quarter. Exports, however, contracted in Q1 on shrinking sales of oil. Meanwhile, the independent Fiscal Rule Committee relaxed its fiscal deficit targets for this year and next to account for the added burden of Venezuelan migrants on the public purse. The three leading credit rating agencies subsequently expressed concern that frequent changes to the rule could undermine the credibility of fiscal policy. In the political arena, the Lower House rejected President Duque’s attempts to roll back aspects of the peace accord in early April, thus reaffirming the challenges of enforcing the ruling party’s mandate in a deeply divided Congress.

Growth is set to climb this year on an acceleration in exports. Moreover, fixed investment should surge on infrastructure and oil sector investments, although the government’s fiscal consolidation efforts will likely cause domestic demand to decelerate slightly ahead. Downside risks stem from uncertainties over the pace of fiscal reform and challenging external conditions.

FocusEconomics panelists expect GDP to grow 3.1% in 2019, which is unchanged from last month’s forecast, and 3.2% in 2020.

LATAM Monetary & Financial Sector News

Inflation climbed in March to 8.3% (February: 7.6%). A jump in Brazil’s inflation, due to a hike in gasoline prices, and sky-high price pressures in Argentina, amid pass-through from the weak peso, drove the rise.  Price pressures should subside somewhat ahead, held back by weak demand pressures. A preliminary estimate for April suggests that inflation rose to 8.6%.

Most central banks have held rates steady in recent meetings, reflecting contained inflation and reduced pressure from global monetary policy normalization. Argentina remains a stark exception, where policymakers resort to unconventional measures to tame inflation. In April, the country’s Central Bank stated that it would intervene more aggressively in the exchange rate market.      

Most of the region’s currencies lost ground against the U.S. dollar in recent weeks, as concerns over the global economy and trading relations between the world’s two largest economies hurt riskier assets. Lower prices for some commodities also weighed on commodity exporters. Colombia’s peso was particularly hard-hit, weighed on by fiscal concerns. 

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