Latin America: Economy starts year on a brighter-than-expected note as Argentina turns a corner
July 12, 2017
The Latin American economy returned to growth at the start of 2017, after nearly two years of declining activity. Comprehensive GDP data for the region shows that the economy expanded 0.8% annually in Q1, a notch above last month’s preliminary 0.7% increase (Q4 2016: -0.3% year-on-year). The upward revision was chiefly due to a stronger-than-expected quarter in Argentina, where the economy turned a corner and grew for the first time in almost a year. Resilient domestic demand propped up the economy, although growth was still meagre as the country undergoes a tough adjustment to radical economic reforms and is plagued with a high unemployment rate.
While Q1’s reading suggests the region’s economy has finally embarked on a recovery, overall dynamics are still weak and a number of economies disappointed at the start of the year. In Chile, a 43-day-long strike at the Escondida copper mine brought economic growth to a near standstill, while devastating floods and landslides disrupted momentum in Peru. Meanwhile, high unemployment continues to drag on Brazil’s economy, while low confidence levels are constraining activity in Colombia. The FocusEconomics panel sees growth rising modestly to 1.1% in Q2.
Politics remain crucial to speed of recovery
The Latin America economy is seen growing 1.4% in 2017, unchanged from last month’s forecast and notably above 2016’s fall. Although panelists held their projections stable this month, clouds are gathering over the region’s outlook. In Brazil, the political scene has gone from bad to worse in recent weeks after President Michel Temer was implicated in a corruption scandal. Calls for Temer’s resignation have risen and whether he has the support to pass crucial economic reforms is uncertain. Meanwhile, renegotiation of NAFTA has the potential to dampen growth in the other regional giant, Mexico. Negotiations are set to kick-off in August and could impact confidence and hurt the country’s currency. Next year, the region’s economy is seen gaining traction and growing a stronger 2.3%.
This month’s stable outlook reflects diverging prospects across the region. Economists that participated in this month’s LatinFocus Consensus Forecast downgraded the 2017 GDP forecasts for 5 of the 11 economies surveyed in this report, including Brazil and Chile. However, the second largest economy in the region, Mexico, saw brighter prospects along with Ecuador and Uruguay. The forecasts for Argentina, Bolivia and Paraguay were held unchanged.
Head on over to our Latin American page for more recent economic news on the region.
ARGENTINA | Growth returns despite poor labor market
The economic recovery is firming up, with recently released data showing that GDP expanded on an annual basis in Q1 after three quarters of sizeable drops. The expansion was underpinned by a turnaround in private consumption—despite rising unemployment—and fixed investment. The latest economic indicators tend to corroborate this brighter picture; economic activity expanded again in April and exports continued to rise in May, albeit modestly, while industrial production rebounded vigorously in the same month, on the back of strong external demand for food products and a jump in output in the automobile industry. However, households maintain a wait-and-see approach amid a slower-than-desired economic rebound, as signaled by June’s disappointing consumer confidence figure. In a bid to reaffirm the country’s rehabilitation in the financial markets, the government sold USD-denominated 2.75 billion of 100-year bonds in June. The government has affirmed it is on course to meet its fiscal targets, although the fiscal deficit in H1 was amply financed by a sustained expansion in the monetary base.
The economy is set to rebound this year. Still low interest rates across the globe and high domestic rates will attract foreign capital, which, together with higher public infrastructure spending, will spur investment. Moreover, households will reap the benefits of falling inflation, while a weakening peso should support exports. Analysts foresee the economy expanding 2.6% this year, unchanged from last month’s forecast, and 2.7% in 2018.
BRAZIL | Politics threatens to disrupt economic recovery
The political scene has gone from bad to worse in recent weeks, jeopardizing the economy’s recovery. The attorney general charged President Michel Temer with accepting millions of dollars in bribes on 26 June, making him the first sitting leader in Brazil’s history to face criminal charges. The move was the latest in a lengthy inquiry that has seen dozen of politicians, including cabinet members, placed under investigation or charged for corruption. While at this point, it seems unlikely that Temer will be found guilty—two-thirds of the Lower House of Congress must vote in favor of a trial for the case to move to the supreme court—the accusations have further dented Temer’s already abysmal popularity and are threatening his economic reforms. On 30 June, a nationwide protest was held against labor and pension reforms. The political unrest dampened both consumer and business confidence in June, although less-recent hard data suggests that a moderate recovery is underway. Industrial production expanded for a second consecutive month in April and the unemployment rate fell in May.
The political turbulence caused a second consecutive downgrade to Brazil’s outlook this month. The FocusEconomics panel sees GDP expanding a meagre 0.4% in 2017, which is down 0.1 percentage points from last month’s forecast. The recovery is seen gaining speed in 2018 and GDP should increase 2.0%.
COLOMBIA | Fiscal consolidation efforts to hurt investment
The Ministry of Finance presented this year’s medium-term fiscal plan on 14 June. The new macroeconomic assumptions include a downward revision to GDP growth this year, partially refl ecting Q1’s disappointing reading. While the economy is expected to pick up in 2018, public spending is projected to fall—the result of fiscal consolidation efforts—and thus represents a downside risk to GDP growth. The fiscal plan also presented the first estimates for the costs of implementing the peace deal with FARC, which amount to about 15% of 2016’s GDP over the course of the next 15 years.
GDP growth accelerate slightly in 2017 on the back of accommodative monetary policy, stronger government consumption and higher commodities prices. Analysts expect the economy to grow 2.0% in 2017, which is down 0.1 percentage points from last month’s forecast. For 2018, our panel projects economic growth of 2.8%.
MEXICO | All eyes on upcoming NAFTA talks
The economy seems to have closed H1 on a much better note than had been expected at the outset of the year. Following a weak start to Q2, the external sector regained its momentum in May as exports leaped thanks to a strong manufacturing sector, while leading PMI data suggest that operating conditions among manufacturers improved further in June. In the domestic economy, private consumption growth continued to defy market expectations of a soft landing. April’s seasonally-adjusted figure was shy of a five-year high as a robust labor market and soaring remittances continued to shore up household spending.
The economy’s momentum will peter out toward year-end as private consumption takes a back seat and fixed investment remains depressed as a result of a plunge in public capital expenditure. While improved dynamics in the manufacturing sector will lift growth to an extent, the risk that the renegotiation of NAFTA will be disorderly—the talks are slated to begin on 13 August at the earliest—still tilts the balance of risks to the downside. Our panel of economists expects GDP to grow 2.0% this year, which is up 0.1 percentage points from last month’s forecast, and 2.2% in 2018
MONETARY SECTOR | Latam ex-Venezuela inflation falls to lowest level since February 2013
Inflationary pressures in Latin America—without considering the current period of hyperinflation in Venezuela—continued to fall in June, easing to a multi-year low. The FocusEconomics preliminary regional estimate showed that Latin America’s inflation (ex-Venezuela) fell from May’s 6.1% to 5.8% in June.
Lower inflation has given central banks some space to loosen monetary policy this year, and Colombia loosened its policy stance for a fourth consecutive meeting in June. Mexico has been the region’s big exception, where high price pressures have fueled a tightening cycle this year. However, the Banxico struck a dovish tone in its June communique leading to speculation that the tightening cycle could be coming to an end.
Venezuela is experiencing an episode of near hyperinflation and, if we include it in the aggregate, inflation in Latin America is projected to end this year at 34.4%. Excluding Venezuela, Latin America’s inflation is expected to fall to 6.4% this year. Going forward, analysts project regional inflation excluding Venezuela to fall further to 5.3% in 2018 (32.1% including Venezuela).
Written by: Angela Bouzanis, Senior Economist