Latin America: Activity firms up in Q3
January 17, 2018
Comprehensive data confirmed that economic momentum gained speed in Latin America in the third quarter. Regional GDP increased 1.7% annually, matching last month’s preliminary estimate and marking a strong acceleration from Q2’s 1.1% expansion. The region’s economy is showing clear signs of strengthening, thanks to an accommodative global backdrop and a stabilizing domestic environment. Inflation is finally in check, allowing central banks to cut interest rates, and confidence is increasing as the recovery takes hold.
Recently released data for Argentina revealed that growth jumped in the third quarter amid surging domestic demand. President Mauricio Macri’s reform agenda has started to bear fruit, helping stimulate activity, and private consumption is being boosted by strong credit growth and rising real wages. Ecuador’s economy also gained traction in Q3, aided by buoyant household spending. Overall, stable or accelerating growth was seen in nearly every economy, except for Bolivia, Mexico and Uruguay, which all lost momentum in the third quarter. Meanwhile, Venezuela’s economy is expected to have remained in a deep crisis; however, the latest available official GDP data is for Q3 2015. In an annual 18K filing with the U.S. Securities and Exchange Commission in December, the government reported that GDP fell 16.5% in 2016.
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As incoming data suggests that the region’s economic recovery is continuing on firmer footing, political events have been in the spotlight in recent weeks. In Chile, former president and center-right candidate Sebastián Piñera won the second-round runoff presidential election on 17 December, boding well for the country’s economy. Piñera campaigned on a platform aimed at boosting competition and entrepreneurship. Key proposals to simplify the outgoing President’s tax reform and reduce the corporate tax rate should bode well for the business climate. However, Piñera could run into roadblocks enacting his platform due to a lack of parliamentary majority.
In Peru, a turbulent few weeks culminated in President Pedro Pablo Kuczynski reshuffling his cabinet, after political crisis triggered several resignations and protests. The president has been under fire by the opposition, which holds a majority in congress, for months. He was almost ousted in an impeachment vote in December over corruption allegations. While the situation has stabilized, Kuczynski is in a fragile position, and it is unknown if he will be able to hang on to office or pass legislation in the coming months, due to the ongoing corruption investigations and a lack of political support.
Growth set to accelerate in 2018
Latin America’s economy is seen accelerating in the coming quarters, with GDP growth set to expand this year at the fastest pace since 2013. Chiefly behind the region’s faster forecasted growth are expected stronger recoveries in major players Argentina and Brazil. Reform efforts and a healthy global backdrop are seen shoring up growth in Argentina, while Brazil is expected to benefit from lower interest rates and a recovering labor market. The LatinFocus Consensus Forecast for the region is unchanged this month, and analysts see regional GDP growing 2.4% in 2018. In 2019, growth is seen rising modestly to 2.7%.
Politics are a key risk to the region’s outlook as the election cycle continues this year. The victory of Piñera in Chile bodes well for reforms and growth in the country. Market-friendly outcomes in other countries will, however, be critical for ensuring badly needed economic reforms are enacted. Fiscal strategies will be key, as many economies in the region suffer from weak government accounts. Meanwhile, the future of NAFTA and its impact on Mexico’s economy is also a key risk to the outlook.
This month’s stable outlook was due to unchanged projections for 5 of the 11 economies included in this report, including regional heavyweight Mexico. In addition, upward revisions to the forecasts for Brazil, Chile and Ecuador were balanced out by downgrades to Argentina, Paraguay and Venezuela’s outlooks.
Peru is expected to be the region’s top performer this year, with economic growth of 3.9%. Bolivia and Paraguay are seen as coming in close behind, with projected growth rates of 3.8%. At the other end of the spectrum, Venezuela is seen contracting 6.1% as macroeconomic distortions and hyperinflations hold the economy in a devastating recession.
BRAZIL | Vote on pension reform postponed amid lack of political willpower
The economy is gaining momentum despite political uncertainty. GDP growth accelerated in the third quarter thanks to faster household consumption and a smaller fall in fixed investment. Available data for the fourth quarter points to another pick-up in activity, although growth is not yet firing on all cylinders. Retail sales rebounded in November, and exports grew by double digits in December; however, consumer confidence edged down in the same month. In the political arena, the government postponed a vote on the crucial pension reform bill to February, to have more time to generate support for the bill. The move underscores the difficulty President Michel Temer is having in pushing through badly needed, but unpopular, measures to put government finances on a sustainable path. Legislation is expected to come to a standstill in the spring, as the October 2018 elections approach; the economy needs a reform-minded president to address lingering macroeconomic imbalances. Former President Luiz Inácio Lula da Silva, who opposes Temer's policies, is currently leading in early polls, but it is uncertain if he will be eligible to run due to corruption charges.
The recovery is seen gaining speed this year, thanks to higher household spending and investment growth. Politics and a lack of reforms are the largest risks to Brazil’s economic trajectory, and are clouding the country’s outlook. FocusEconomics panelists see the economy growing 2.5% in 2018, which is up 0.1 percentage points from last month’s forecast. In 2019, growth is seen edging up to 2.6%.
MEXICO | Data suggests muted growth in Q4
Mexico is navigating choppy economic waters, with leading data for Q4 indicating that growth only recovered somewhat from Q3’s near four-year low. Industrial data up to November remained depressed due to free-falling mining output and decelerating manufacturing production growth. Retail sales contracted again on an annual basis in October on the back of moderating credit growth, painfully high inflation and a weak peso. PMI releases for the October-to-December period suggest economic activity recovered from earthquake- and hurricane-related disruptions and grew at a moderate clip, but lingering uncertainty regarding NAFTA and presidential elections in July likely continued to stave off fixed investment in the quarter.
Economic growth will remain subdued throughout the first half of the year, weighed down by uncertainty, high inflation and softening employment gains. Analysts expect growth to then pick up in the second half of the year as inflation gradually eases and political noise recedes, which should allow the Central Bank to ease monetary conditions, further boosting the economic recovery. The FocusEconomics panel expects growth of 2.2% in 2018, which is unchanged from last month’s estimate. For 2019, analysts see growth accelerating to 2.4%.
ARGENTINA | Reform successes bode well for economy
President Mauricio Macri’s government made important progress in his drive to liberalize the economy. The 2018 budget and a highly controversial tax and pension reform plan were approved by the congress in the final weeks of 2017. The pension and tax reform envisages lowering the government’s elevated public sector spending and making Argentina a more attractive investment destination. It should give a further impetus to the economy, which is on a solid recovery path, as confirmed by the latest data. Economic growth reached 4.2% annually in Q3, a notable acceleration from Q2’s 2.9% expansion and the fastest print in over four years. Despite strong GDP growth, the economy remains under pressure. On 28 December, the Central Bank revised its inflation target for the next two years, as the country missed its 2017 target and tight monetary conditions are stifling economic activity. The announcement caused the peso to depreciate sharply and will likely undermine the Bank’s credibility in anchoring inflation and achieving the government’s fiscal reduction plans.
Argentina’s economy is set to accelerate in 2018 and 2019 amid solid growth in private consumption and fixed investment. FocusEconomics panelists see the economy expanding 3.0% in 2018, which is down 0.1 percentage points from last month’s forecast. For 2019, growth is expected to reach 3.2%.
COLOMBIA | Ceasefire expires with ELN rebels, creating security concerns for oil infrastructure
Incoming data for Q4 2017 was mixed, but the ongoing economic recovery following last year’s oil price shock likely lost some steam. Industrial output dropped in October, albeit at a considerably more moderate rate. Retail sales swung to contraction, signaling a slowdown in private consumption, as consumer confidence deteriorated in the month. Export growth slowed again in November. On the flipside, November saw a slight lift in consumer confidence, which is likely to have fueled higher household consumption in the month. The government reduced its 2017 calendar year budget amid lower-than-expected tax revenues and S&P’s credit rating downgrade on 11 December to meet fiscal targets. Tensions erupted on the political scene after rebels from the National Liberation Army (ELN) struck the Caño Limón oil pipeline and a naval base in Arauca province on 10 January, shortly after a three-month ceasefire with the government expired. In the wake of the attacks, peace talks that began last year to resolve the more than 53-year long conflict were stalled. The resurgence of attacks presents a significant setback and could disrupt economic activity if fighting escalates.
Growth is expected to accelerate this year as exports recover on rising oil prices. Private consumption should also pick up, supported by an anticipated moderation in inflation. Moreover, ongoing structural reforms should aid economic diversification efforts and boost competitiveness. FocusEconomics panelists expect GDP to grow 2.6% in 2018, which is unchanged from last month’s forecast, and 3.0% in 2019.
MONETARY SECTOR | Inflation rises in December
A preliminary estimate for inflation, without considering the current period of hyperinflation in Venezuela, revealed that price pressures rose in Latin America in December. The FocusEconomics regional estimate showed that inflation in Latin America (excluding Venezuela) was 6.5% in December, above November´s 5.7%. The rise in price pressures was partly due to higher inflation in Argentina. Price pressures have been elevated in Argentina, mainly due to a weakening of the peso.
Despite the rise in December, the print confirms that inflation is finally under control in the Latin American (ex-Venezuela) economy. Price pressures have declined notably since inflation ended 2015 at 9.0% and 2016 at 8.7%. During the 2015–2016 economic slump, weak currencies and macroeconomic imbalances elevated inflationary pressures.
Falling inflation has created space for several central banks to ease interest rates to support economic activity. In Brazil, policymakers cut the SELIC rate to 7.00% in December, continuing a string of cuts in 2017. In Peru, the Central Bank also decided to reduce its main policy rate at its first meeting of 2018, following four cuts in 2017. In contrast, policymakers in Argentina and Mexico went against the regional trend last year, as stubbornly high inflation led their central banks to hike rates in 2017. In December, policymakers in Mexico hiked the policy rate to 7.25%. Officials in Argentina, however, decided to cut the policy rate at the start of 2018, after revising up the inflation target in the final days of December.
Price pressures are seen falling further this year, and regional inflation excluding Venezuela is seen ending 2018 at 5.5%, which is up 0.2 percentage points from last month’s forecast. The upward revision is largely due to higher inflation forecasts for Argentina and Mexico. In 2019, inflation is seen ending the year at 4.8%. Venezuela is experiencing an episode of hyperinflation; if we include it in the aggregate, inflation in Latin America is projected to end 2018 at 108.8% and end 2019 at 38.3%.
Written by: Angela Bouzanis, Senior Economist