Economic Snapshot for Latin America

July 10, 2019

Regional growth is seen remaining soft this year

Regional growth is seen remaining soft this year and the forecast was cut for the fourth month in a row in July. Trade tensions and subdued external demand will hamper exports, and spillover into investment, which is also being held back by political uncertainty in key economies. Activity is expected to be sluggish in major players Brazil and Mexico, while Argentina will remain in recession.

Brazil Economic Outlook

Incoming data suggests that the economy is struggling to gain momentum after GDP contracted for the first time since the 2015–2016 recession in Q1. Economic activity contracted again and retail sales dropped in April, while industrial production fell in May—suggesting broad-based weakness. Moreover, business sentiment waned throughout Q2, hitting a six-month low in June and erasing some earlier gains from initial post-election optimism, while exports stagnated due to subdued external demand. In the political arena, there is some optimism that the government could pass critical pension reform in the lower house before the 18 July recess. The reform is expected to save around BRL 940 billion (approximately USD 244 billion) over the next decade and help put government finances on a more sustainable path. Optimism over its passage has supported the real and Brazilian assets in recent weeks.       

The recovery is seen stagnating this year. Export growth will be hampered by a slowing global economy, a crisis in key trading partner Argentina and woes in mining giant Vale. Moreover, investment is expected to lose steam, plagued by soft sentiment due to economic and political worries. Brazil’s prospects were cut for the fifth consecutive month in July.

FocusEconomics analysts project growth of 1.1% this year, which is down 0.3 percentage points from last month’s forecast, and 2.2% in 2020.

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Mexico Economic Outlook

Although the United States shelved its so-called immigration tariffs on Mexican imports before they went into effect in early June, the ordeal’s toll on economic sentiment highlighted the degree to which uncertainty has been hounding the economy this year. Available second-quarter indicators suggest that additional private-sector setbacks heading into midyear sent what was expected to have been a modest recovery off-course. Dismal economic activity in April reflected deteriorating industrial output and tepid retail sales, while survey-based data through June signaled the economic costs of a trade spat with the U.S. and the policy uncertainty related to AMLO’s nascent presidency. Meanwhile, following debt-related warnings by Fitch Ratings and Moody’s in June, mounting concerns over state-owned Pemex and aggravated downside risks to growth hint that financial assets could experience volatility in the months ahead.

Uncertainty looks set to confound the economy this year. The unfolding diplomatic crisis has upset the possibility of a swift ratification of the USMCA, while AMLO’s unpredictability is expected to continue weighing on activity domestically. Downbeat manufacturing gains amid a stateside cool-off and flagging oil and gas output are also seen hindering growth prospects.

Amid strained relations with the U.S., FocusEconomics analysts again lowered their growth forecasts in July. As such, they now see growth at 1.3% this year, which is down 0.2 percentage points from June’s forecast, and at 1.7% in 2020.

Argentina Economic Outlook

GDP continued to dive in Q1, on the back of another sharp contraction in domestic demand, only partially cushioned by a stronger external sector. Nevertheless, available indicators for Q2 point to a significant improvement: The pace of contraction eased markedly in April, thanks to surging agricultural and fishing production; and the trade surplus jumped in April−May. On the fiscal front, the government posted a primary surplus of 0.2% of GDP in January−May, which keeps it on track to meet goals outlined in the IMF deal. Meanwhile, on 5 July, the IMF concluded the fourth review of the Stand-by Agreement, which paves the way for the disbursement of additional USD 5.4 billion. The Fund stated that current economic reforms are improving fiscal and external positions. In the political arena, in early June, President Macri chose Miguel Pichetto, a moderate Peronist, as his vice-presidential candidate for October’s election. With analysts hopeful the move could broaden Macri’s voter base, equity markets climbed on the news.

Argentina is seen remaining in recession in 2019, as elevated interest rates, stubbornly-high inflation and shrinking public investment hit domestic demand. However, surging agricultural production and a weaker peso will benefit external accounts, while budget restraint improves fiscal metrics. Political uncertainty ahead of October's elections poses downside risks.

LatinFocus Consensus Forecast analysts see the economy contracting 1.4% in 2019, which is down 0.1 percentage points from last month’s estimate, before expanding 2.1% in 2020.

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Colombia Economic Outlook

Available data suggests that the relatively weak dynamics of Q1 persisted in the second quarter. Retail sales growth eased in April, which, coupled with consumers turning more pessimistic, on average, in April–May compared to the first quarter, signals that private consumption lost some strength. Furthermore, industrial production contracted for the first time in over a year in April. This, alongside the manufacturing PMI entering contractionary territory in June, following fairly positive readings in April and May, hints at softer business activity in Q2. In other news, the government announced in early June that the original fiscal deficit targets of 2.4% and 2.2% of GDP will be maintained this year and next, respectively, despite being allowed to relax them to address the influx of Venezuelan migrants. Some concern remains, however, over the credibility of the pace of fiscal consolidation.

The economy is expected to gather some momentum this year, primarily on the back of upbeat capital spending on infrastructure and oil-sector projects, and solid private consumption. That said, fiscal tightening and slower export growth are seen weighing on overall activity. Uncertainties surrounding fiscal reform and a challenging external environment cloud the outlook. 

FocusEconomics panelists expect GDP to grow 3.0% in 2019, which is down 0.1 percentage points from last month’s forecast, and 3.2% in 2020.

LATAM Monetary & Financial Sector News

Complete data revealed that regional inflation came in at 8.8% in May, matching April’s reading. Inflation is lingering around the highest level in two years. Price pressures are expected to fall by year-end, amid ample economic slack and thanks to a relatively solid performance by regional currencies. 

Contained inflation and a dovish outlook for U.S. monetary policy have allowed most central banks to hold rates at relatively low levels recently, with Brazil, Colombia and Peru making no change to policy rates. Mexico’s Central Bank also held rates but they remain at a decade high, while policymakers in Argentina continued to use unconventional measures to fight sky-high inflation. 

Nearly all of the region’s currencies made gains against the U.S. dollar in recent weeks, supported by a dovish outlook for interest rates in the world’s largest economy.  Argentina’s and Colombia’s pesos were among the top performers, recouping some of the losses earlier in the year. This year, regional currencies are expected to modestly depreciate against the USD. 

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