Economic Snapshot for Latin America

March 13, 2019

Weak Q4 2018 caps sluggish year for Latin America

Latin America’s economic recovery appeared to veer off the rails somewhat through last year’s fourth quarter, ending a chaotic year for the regional economy. A preliminary estimate by FocusEconomics revealed that the regional economy grew 1.2% year-on-year in the fourth quarter; if confirmed, this would be down from the third quarter’s 1.5% outturn and would mark a full year of slowing economic activity. Deteriorating inter- and intraregional trade has been weighing on the regional economy, as has last year’s noisy political wrangling and, more broadly, emerging-market (EM) turmoil. One-off shocks to the region’s major-player economies also took their toll.

Fourth-quarter national accounts for Brazil and Mexico stunted the regional outturn. In Brazil, on the heels of an exhausting general election, weaker fixed investment weighed on domestic demand, which ground to a near-halt despite more upbeat household spending. Export growth, meanwhile, jumped despite regional tumult—particularly in Argentina—and a deteriorating external-sector backdrop. Mexico, on the other hand, was bruised by a faltering industrial sector, which notched losses due to plunging mining output and decreased construction activity. Manufacturing output, a bellwether for the economy, decelerated through last year-end in line with the slowdown stateside.

Conversely, fourth-quarter national accounts for Colombia and Peru, the only other economies for which they are currently available, revealed year-end pick-ups. Across both economies, fixed investment fueled faster domestic demand. Notably, neither was afflicted by the uneven regional economic recovery: Exports of goods and services accelerated in both countries.

On the political front, Venezuela’s political standoff appears in limbo as Nicolás Maduro and Juan Guaidó, each backed by a smattering of the international community, continue to vie for the country’s top spot. Guaidó’s return to Venezuela in early March, moreover, and the announcement of new sanctions by the United States have only complicated matters. As it stands, it is uncertain whether Maduro will be able to cling onto power. A handful of analysts have already begun forecasting a political transition, although recent actions by the U.S. could inadvertently serve to boost Maduro’s standing in the country.

Meanwhile, on a more optimistic note, recently-elected President Jair Bolsonaro of Brazil and President Andrés Manuel López Obrador (AMLO) of Mexico have both managed to impress financial markets in recent weeks. In mid-February, in a move praised by analysts, Bolsonaro presented Congress with a comprehensive social-security bill intended to rescue the government’s finances over the longer-term. Meanwhile, AMLO recently completed his first 100 days in office with sky-high approval ratings on the heels of what has been a volatile few months for Mexico’s economy.

See the Full FocusEconomics Latin America Report

Full-year regional growth stable amid increasingly fraught backdrop

Full-year regional growth came in at 1.5% last year (previously reported: +1.6% year-on-year). Improved economic backdrops in Argentina and Brazil, however, are expected to lift regional growth this year. Argentina’s economic fortunes should gradually improve as the IMF’s prescriptions take effect, while Brazil’s new government is expected to pursue serious-minded economic reforms, bolstering economic sentiment in the process. More broadly, however, the region’s economic recovery appears fragile given Argentina’s general election this autumn and how quickly sentiment could turn on Brazil’s new government should change not materialize quickly enough. Meanwhile, on the external front, the regional narrative will continue to be shaped by investors’ appetite for emerging-market risk. A global cool-off at the hands of U.S. and Chinese negotiators remains a key downside risk.

Latin America’s full-year growth prospects were left intact in recent weeks; regional growth is seen at 2.2% this year, which is unchanged from last month’s forecast. That said, the region’s largest economies—Argentina, Brazil and Mexico—had their growth forecasts lowered while only Bolivia had its growth forecasts raised in recent weeks. Meanwhile, the remaining economies had their growth forecasts left intact. Next year, regional growth is seen reaching 2.6%.

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.

Venezuela’s short-term outlook is grim. On the one hand, the political situation remains in limbo, with the Maduro government likely opting to wait out the crisis while Guaidó strives to keep up the momentum. On the other hand, financial sanctions aimed at choking off the government’s access to external financing and its oil revenues inflict more damage to an already-crippled economy besieged by run-away inflation and goods shortages. The possibility of political change has increased amid the latest events, a scenario which some of our panelists have factored into their forecasts. FocusEconomics panelists see the economy contracting 12.4% in 2019, which is down 2.1 percentage points from last month’s forecast. In 2020, the panel sees GDP falling 2.5%.

BRAZIL | Bolsonaro unveils comprehensive social-security reform bill

Brazil’s lackluster fourth quarter capped off a second, unenthusiastic year of economic recovery. Plunging inventories and weaker fixed investment caused growth to slow in Q4, while consumption was uneven. Public spending fell while private spending largely held up. Available indicators for the first quarter of 2019, meanwhile, have been patchy, revealing little positive carryover from last year’s stumble: Improved economic sentiment through February bodes well for domestic demand in the first quarter, but exports swung to contraction in February. In mid-February, Jair Bolsonaro took aim at the government’s strained finances and presented a bold vision for social-security reform. His ambitious plans, which set out to save more than BRL 1 trillion over the next decade, impressed markets. Congressional approval remains far from certain, however, and most analysts expect any successful legislation to get heavily watered down.

The end of last year’s frenzied election is expected to make way for improved economic sentiment over the short-term and, along with continued employment gains and accommodative monetary policy, should kick the recovery into a higher gear. In addition, the U.S. Federal Reserve’s dovish turn should bode well for the outlook. Implementation of sorely-needed economic reforms remains pivotal.  FocusEconomics analysts put growth at 2.3% this year, which is down 0.1 percentage points from last month’s forecast, and at 2.5% next year.

MEXICO | S&P Global Ratings puts AMLO’s energy-sector plans on notice

Fourth-quarter national accounts were bleaker than initially thought, highlighting the increasingly challenging economic backdrop dominated by heightened policy uncertainty and a slowdown north of the Rio Grande. A supply-side analysis pinned the letdown squarely on the industrial sector, which was held back by plunging mining activity and a slump in construction works. Manufacturing output, however, was the main culprit, decelerating for a second consecutive quarter amid a slowdown stateside. Agricultural- and services-sector output, meanwhile, held up. Turning to the current quarter, available indicators have been more upbeat. Consumer confidence hit a record high in January on AMLO’s first months in office, while industrial-sector surveys revealed new optimism among firms in February. On 1 March, however, S&P Global Ratings cut its outlook on Mexico’s investment-grade credit rating on fears of exacerbated fiscal woes and decreased private-sector investment as the government aims to hike spending on heavily-indebted Pemex, the state-run oil company.

Domestically, buoyant household spending will struggle to offset flagging investment this year as firms hold off in response to policy uncertainty. On the external front, the stateside cool-off will hit exports. Ratification of the new NAFTA, meanwhile, could face headwinds—although most analysts still see it as a done deal. FocusEconomics analysts lowered their full-year growth forecasts in recent weeks and now see growth at 1.8% this year, down 0.1 percentage points from last month’s forecast. Next year, they see growth at 2.0%.

See the Full FocusEconomics Latin America Report

ARGENTINA | Recession appears to deepen through Q4 2018

Economic activity plunged throughout Q4 2018, hit by sky-high interest rates, a contraction in credit, soaring inflation and downbeat consumer confidence. December’s fall in economic activity was a familiar story, characterized by a contraction in most sectors. Nevertheless, shrinking domestic demand, coupled with growing agricultural output and the delayed effects of a weaker peso, are leading to a notable external adjustment. In January, the trade balance remained in surplus for the fifth consecutive month, while the primary surplus widened notably in annual terms in the same month, following a notable reduction in the primary deficit in 2018. On the political front, in late February, President Macri announced the government would extend USD 2.6 billion in loans to private companies at favorable interest rates, in a bid to cushion the ongoing credit crunch.

The economy should gradually leave recession behind this year. That said, high inflation and interest rates will weigh on consumer spending and fixed investment, with the latter also hit by a notable contraction in public investment. Rising agricultural output and shrinking domestic demand will, however, lead to a sizable reduction in the current account deficit. The uncertain outcome of October’s elections clouds the outlook. LatinFocus Consensus Forecast analysts see the economy contracting 1.1% in 2019, down 0.1 percentage points from last month’s estimate, and expanding 2.5% in 2020.

COLOMBIA | Economic growth picks up at end of last year

Growth climbed markedly last year on stronger domestic demand, although the slight upturn at year-end was weaker than expected. Entering 2019, consumer confidence regained some lost ground in January after tumbling in Q4 on uncertainty around the tax reform bill, and while the PMI slid into negative territory in January and February, the downturn is expected to be short-lived. On the political front, President Iván Duque has clawed back some popularity over his tough stand on Venezuela, after his approval ratings had plunged over the financing law. With regional elections slated for October, the four-year USD 355 billion National Development Plan sits at the top of the administration’s agenda. However, it remains to be seen whether President Duque can muscle through reforms needed to meet the ambitious fiscal targets. Of particular contention are proposals to cut gas and energy subsidies, which critics have argued that, while aimed at fiscal consolidation, would end up hurting the poorest.

The economy is set to gain speed this year on stronger export growth and solid domestic demand dynamics, led by an acceleration in fixed investment. Moreover, given limited changes to VAT in the tax reform bill, private consumption growth should remain robust amid a tight labor market. Uncertainties remain over the pace of fiscal reform, however, especially given the government’s tense relationship with Congress and with local elections scheduled later in the year. Risks to the outlook also stem from a decline in commodity prices and tighter financing conditions. FocusEconomics panelists expect GDP to grow 3.1% in 2019, which is unchanged from last month’s forecast, and 3.2% in 2020.

MONETARY SECTOR | Regional inflation moderates in February

A preliminary estimate revealed that regional inflation slowed to 7.5% in February (January: 7.7%). Oil-price pressures have moderated in recent months and have helped offset higher food costs.

Meanwhile, in late February, policymakers in Argentina reacted to an uptick in inflation at the outset of the year by tightening the Central Bank’s guidelines for intervening in the foreign-exchange market.

Regional inflation is expected to moderate this year amid the fading impact of the end-2017 oil-price spike—and weaker inflationary pressures in Argentina. Inflation is seen ending the year at 6.0%, which is up 0.1 percentage points from last month’s forecast. Inflation is seen ending next year at 5.1%.

Venezuela is suffering from hyperinflation due to exchange-rate misalignments and basic-goods shortages and has, therefore, been excluded from the regional aggregate. Despite last year’s currency overhaul and authorities’ pledges to scale back monetary financing, they have been unable to tame hyperinflation. In turn, our panel sees inflation in Venezuela surging to over 70,000,000% by the end of the year

See the Full FocusEconomics Latin America Report

Angela Bouzanis

Senior Economist