Weak recovery in commodities prices will dampen the Latin America's growth
February 17, 2016
Latin’s America’s economic performance in the past two years was nothing to write home about. Aggregate regional GDP slowed sharply to 1.0% in 2014 and is expected to have contracted in 2015. Economic activity in the region began to deteriorate in Q3 2015, when GDP decreased 0.6% on an annual basis (Q2: +0.1% year-on-year), and preliminary data suggest that the region’s contraction deepened even further in the final quarter of the year. The economy is expected to have contracted 1.0% in Q4 as it was dragged down by mounting economic problems in Brazil, which is by far the region’s largest economy, as well as by Venezuela’s economic crisis growing worse. In fact, most of the economies in the region decelerated in the fourth quarter as a drop in the business and credit cycle in some countries and policy mismanagement in others were exacerbated by the weakness in commodities prices toward the end of the year.
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Although a lackluster recovery in commodities prices is expected later this year, the slide in prices observed in recent weeks that was led by a renewed fall in oil prices sent signs that persisting low commodities prices will again contribute to a year of disappointing economic performance in Latin America. The impact of subdued commodities prices will be felt most strongly in the economies for which oil accounts for a significant share of GDP, exports and fiscal revenues: Venezuela, Colombia, Ecuador and, to a lesser extent, Brazil and Mexico. Yet with metals and agricultural prices also falling substantially, most countries in the region will feel the impact via a deterioration in their terms of trade. Moreover, as the region grapples with tighter monetary conditions, and since several key economies continue trying to deal with large twin deficits, a rebound in economic growth in Latin America is not in the cards, at least during the first half of the year.
Following a year in recession in 2015, the region can hope for marginally positive GDP growth this year
The impact of low oil prices on Latin America’s oil producers and, ultimately, on the region’s economic growth, was clear in 2015. The economy contracted 0.2% last year, which was the first time the region entered into recession since 2009. The region’s main oil producers are Brazil, Mexico and Venezuela, with an estimated oil output of 2.5 million barrels per day (mbpd), 2.6 mbpd, and 2.4 mbpd, respectively in 2015. In per-capita terms, Colombia, Ecuador and Venezuela are the most reliant on oil. Venezuela is by far the most vulnerable economy to declines in global oil prices, followed by Ecuador and Colombia. Reliance on oil is lower in the region’s largest economies of Brazil and Mexico, but, as the oil extracting sector is key in both economies, trends in international prices still have an impact on projects aiming to exploit new oil fields.
Economic prospects for Latin America this year are not particularly encouraging. Despite predictions for an incipient recovery in commodities prices toward the end of this year (see the most recent FocusEconomics Consensus Forecast Commodities report), weakness in prices for key raw materials—such as oil, base metals and agricultural products—will continue to challenge the already weak regional economy. Following last year’s economic recession, Latin America can hope for marginally positive GDP growth this year. Analysts surveyed for this month’s LatinFocus Consensus Forecast expect Latin America’s economy to expand 0.1% in 2016. Risks to the outlook, nonetheless, continued to be tilted to the downside. Analysts cut the region’s GDP forecast by 0.2 percentage points over the previous month, marking the 14 consecutive downward revision to the outlook. Looking at the region on a country basis, forecasters lowered the projections for 10 economies. Mexico was the only economy for which analysts left its projection unchanged. Next year, the region’s economy is expected to perform better and grow 2.3%.
BRAZIL | Government announces measures to shore up the ailing economy
Available data suggest that Latin America’s largest economy remains mired in a deep recession. After recording the largest contraction on record in Q3, business and consumer confidence languished deep in pessimistic territory in January, while the manufacturing PMI continued to point to contraction. Despite the abysmal state of the domestic economy, balance of payments data continue to be a bright spot for Brazil and the current account deficit nearly halved last year. Meanwhile, the government remains focused on trying to halt the economy’s decline. In January, new finance minister Nelson Barbosa announced several different measures which should boost credit by USD 20 billion across the country to help companies weather the recession. The announcement increased skepticism regarding whether Barbosa, who is more left-leaning than his predecessor, is committed to balancing the government’s overspent books.
Brazil’s outlook is grim. The economy is expected to record another deep contraction this year amid slow reform momentum. FocusEconomics panelists see the economy contracting 2.9% in 2016, which is down 0.3 percentage points from last month’s forecast. For 2017, the panel sees the economy rebounding and growing 0.8%.
MEXICO | Economy firms up in 2015, but a significant expansion is not expected in 2016
According to preliminary data, Mexico’s overall economic growth was 2.5% in 2015. This was faster than in the first two years of President Peña Nieto’s administration, when growth came in at 1.4% and 2.3%, respectively. More recent data sent mixed signals: In January, consumer confidence fell, thus losing the previous month’s gain, while the IMEF manufacturing indicator increased. Economic growth remains below its potential of around 3.0%. Furthermore, the economy still faces significant headwinds from a renewed slump in oil prices and a recent slowdown in the U.S. industrial sector, to which Mexico’s manufacturing sector is closely tied. The end of 2015 saw further progress in the ambitious energy reform with the completion of the first of three public tenders for oil exploration, also known as “Round One”. It remains to be seen whether the much more profitable deep-water and unconventional exploration blocks, earmarked for a fourth and fifth auction, will have the same success given their complexity and the current environment of low oil prices.
Notwithstanding an incipient impact from some structural reforms and a strong uptick in private consumption and credit growth, it is highly unlikely that a stronger rebound in GDP will materialize in 2016. Important yet unsurprising challenges lie ahead: weak external demand, persistent low oil prices and further government spending cuts. Analysts expect GDP to increase 2.7% in 2016, which is on par with last month’s forecast. For 2017, the economy is expected to accelerate and expand 3.1%.
ARGENTINA | Government’s priorities move toward reintegration into the global economy and settling a dispute with hedge funds
President Mauricio Macri has had a busy agenda since he took office last December. Macri is moving forward quickly with reform implementation and the country is slowly being integrated back into the global economy. Last month, the government requested full integration into the OECD, thus paving the way for improvements in Argentina’s credit ratings. Macri’s priorities include settling the dispute with the U.S. hedge funds, which has excluded the country from international credit markets for over a decade. The government recently proposed a 25% discount on the defaulted debt and a couple of the hedge funds to which the money is owed accepted the deal. Macri will face his biggest challenges at home, however, as the ruling party does not have a majority in the left-leaning Congress. As a result, the government will need to work with the opposition to get major reforms passed. With the aim of shrinking the fiscal deficit, the government ended the popular electricity bill subsidies in January. According to officials, this change will contribute up to USD 4 billion to the public accounts this year.
GDP growth is likely to decelerate in the short term as the economy slowly adjusts to the new government’s policies. Moreover, external threats, such as the prolonged recession in Brazil and low commodity prices, are clouding the outlook. On the other hand, higher exports helped by a weaker peso and a swap agreement with China will shore up Central Bank reserves. Analysts project Argentina to record flat growth in 2016, which is down 0.2 percentage points from last month’s Consensus. This year’s expected stagnation would be a step in the right direction toward a brighter future. For 2017, analysts project the economy to accelerate and increase 3.3%.
VENEZUELA | Global oil glut resulted in substantial fall in Venezuela’s oil price
Latest data released by OPEC show that the oil supply glut has resulted in a notable drop in the price of Venezuelan oil. Venezuela's reference basket dropped 52.6% in 2015 compared to the previous year, suggesting that public finances had deteriorated sharply. Recent data continue to signal that the economic crisis the country is facing shows no sign of abating. Venezuelan oil prices dropped to the lowest level on record in January and the bolivar traded in the parallel market at a new all-time low against the USD. In recent developments, first reports suggest that the meeting between Saudi Arabia and Russia to halt oil production resulted in an agreement. Even though the meeting’s outcome should come as a relief to Venezuela, concerns remains as to how the oil-dependent country will shore up its public finances and pay the USD 9.5 billion in debt payments that are due this year alone.
Despite the change in Venezuela’s National Assembly, the country’s growth prospects are grim as runaway inflation and low oil prices are likely to keep the economy in a deep recession this year. Analysts foresee a 5.8% contraction in GDP for 2016, which is down 1.0 percentage points from last month’s forecast. For 2017, the panel sees GDP rising 0.2%.
INFLATION | Regional inflation continues increasing at the outset of the year
Inflation in Latin America shot up in 2015 and continued to rise at the start of the year. According to a gauge elaborated by FocusEconomics, the inflation rose from 19.3% in December 2015 to 20.7% in January, mainly due to increases in the majority of economies, including Colombia, Mexico and Peru. Inflation in Brazil remained stable at a multi-year high in January and although Venezuela did not release official data, inflation is likely to have remained close the 200% mark.
Inflation is expected to remain elevated this year and Central Banks in the region will likely continue the tightening cycle that began at the end of last year. Nevertheless, analysts expect that, given lackluster economic growth, the tightening cycle will end soon.
The panel of analysts FocusEconomics surveyed this month see inflation ending 2016 at 20.0%. The projection was revised up 0.9 percentage points from last month and reflected upward revisions to the inflation outlook for 8 of the 11 economies surveyed. The inflation forecasts for Ecuador and Mexico were revised down, while Bolivia was the only country for which the forecast was left unchanged. Venezuela continues to be a source of concern as inflation is expected to stay near 200% in 2016. For 2017, analysts expect Latin America’s inflation to fall to 15.0%.
Written by: Ricardo Aceves, Senior Economist
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