Latin America: Economic Snapshot for Latin America
June 12, 2018
Headwinds mount in the second quarter, following a mixed performance at the start of the year
Preliminary data revealed that Latin America’s economy started the year off on a subdued note. Regional GDP growth came in at 1.6% annually, down from last month’s estimate of 1.7% and a sharp deceleration from Q4 2017’s 2.0% expansion. Weaker growth readings in regional giants Brazil and Mexico chiefly drove the slowdown; however, the first-quarter reading was also skewed by unfavorable calendar effects. While the region is on much better footing after a challenging 2015–2016, the recovery remains weak and economic slack persists. Moreover, recent data for the second quarter suggests that headwinds to growth continue to mount, threatening the recovery’s strength.
Looking at the first quarter’s slowdown in more detail, Brazil’s economy lost significant steam amid contracting government spending, weaker export growth and a slower expansion in investment. Political uncertainty likely weighed on investment, while fiscal adjustment efforts provoked a contraction in government consumption. However, growth was not as disappointing as the headline figures suggest, as a high base of comparison due to a bumper harvest last year and significantly fewer working days impacted the overall result. Likewise, adverse calendar effects also weighed on the headline reading in Mexico. In addition, Mexico’s industrial sector held back growth in the first quarter and the services sector grew modestly due to tighter financing conditions and political noise.
Elsewhere in the region, growth accelerated in Chile, Colombia and Peru in the first quarter. Chile was the region’s best performing economy, with growth hitting a five-year high thanks to surging export growth and a buoyant mining sector. Meanwhile, soaring investment and household consumption amid healthy credit growth and positive sentiment fueled faster activity in Peru. Colombia’s economy also benefited from strong public and private spending in Q1; shrinking investment, however, dented momentum.
After a mixed performance in the first quarter, the economic backdrop has turned notably grimmer in recent months. Political noise has risen notably in major players Brazil and Mexico in the run-up to general elections, acting as a headwind on growth. In Brazil, a strike by trucker’s union Abcam in May and early June paralyzed activity in key economic sectors, likely denting growth in Q2. Moreover, to halt the protest, the government had to backtrack on austerity measures, illustrating the challenge policymakers face in trying to correct the depleted public purse.
In Mexico, meanwhile, left-wing presidential candidate Andrés Manuel López Obrador’s comfortable lead in polls has stoked economic uncertainty and dampened the value of the peso. Controversial policy proposals such as reviewing energy-sector contracts, as well as fears that his presence could further complicate already difficult NAFTA renegotiations, have weighed on sentiment in the country and could dampen investment going forward. The outcome of NAFTA negotiations remains uncertain, and a favorable outcome is vital for the country’s prospects.
On top of political noise, broad-based capital flight away from emerging markets has hit many of the region’s currencies, putting pressure on central banks and threatening supportive conditions. After weeks of financial turbulence, Argentina clinched a USD 50.0 billion deal with the IMF to rebuild economic buffers and shore up funding for the next years. However, tough fiscal consolidation measures and other painful economic reforms come alongside the agreement and will significantly weigh on growth in the near term.
However, recent data for Chile, Colombia and Peru suggests that these economies remained resilient in the second quarter. Higher commodity prices supporting exports and tamer political risks compared to the regional giants are supporting growth momentum. Regional GDP is expected to grow 1.9% annually in Q2.
Regional growth outlook for 2018 downgraded amid turmoil in Argentina and Brazil
Latin America’s growth outlook for 2018 was revised down notably this month, as headwinds to the recovery have mounted in the second quarter. Regional GDP is now seen growing 1.9% in 2018, down 0.3 percentage points from last month’s forecast. Behind the downgrade were sizable downward revisions to Argentina and Brazil’s economic prospects. A slew of weak economic data in Brazil, combined with the crippling truckers’ strike, caused its outlook to be downgraded, while Argentina’s was chopped a massive 0.6 percentage points due to rampant inflation and a tough fiscal adjustment program in the cards. That said, firmer commodity prices and low inflation will continue to fuel the regional growth recovery this year. Politics and trade negotiations remain key risks to the region’s outlook. In 2019, growth is seen rising to 2.6%.
On top of the downgrades to Argentina and Brazil’s forecasts, Uruguay and Venezuela also saw their 2018 prospects worsen this month. Weather-related factors are souring the outlook for Uruguay’s agricultural sector, while Venezuela remains mired in a deep economic crisis. In contrast, Bolivia, Chile and Paraguay had their growth forecasts upgraded, while the four remaining economies saw no changes to their projections.
Bolivia and Paraguay are expected to be the region’s top performers this year, with economic growth of 4.0%. At the other end of the spectrum, Venezuela is seen contracting a massive 10.5%. The country is in a severe economic and humanitarian crisis due to a scarcity of basic goods and dollars, waning oil production and hyperinflation.
BRAZIL | Truckers’ strike freezes economy in Q2
The recovery has lost some traction as the uncertain presidential election draws near. Growth nearly halved in the first quarter on the back of weaker investment and export growth. While the sharp downturn was partly the result of a one-off factor—the first quarter had significantly fewer working days than the same period in 2017—the recovery is far from strong. The unemployment rate rose in Q1, suggesting ample slack, and consumer confidence dropped further into pessimistic territory in May. Moreover, a nationwide strike by the truckers’ union, Abcam, over diesel price hikes in May caused widespread disruptions throughout the country, paralyzing key economic sectors. To end the protest, the government had to backtrack on austerity measures, offering an estimated USD 2.6 billion in concessions. The move illustrates the challenging political environment within which tough reforms need to be passed to correct depleted government accounts. A reform-minded president with political capital to pass legislation is key to improving the economy’s health; however, so far center and reformist candidates have not been performing well in polls prior to October’s general election.
FocusEconomics panelists shaved 0.4 percentage points off Brazil’s growth forecast this month, amid elevated political uncertainty, the truckers’ strike and weak incoming economic data. Panelists see the economy expanding 2.1% in 2018 and 2.7% in 2019.
MEXICO | U.S. slaps tariffs on Mexico as election approaches
Comprehensive data confirmed the economy’s strong start to the year, with broad-based quarter-on-quarter growth in Q1 led by gains in the services and industrial sectors. Meanwhile, the economy appears to have largely gotten off to a solid start in the second quarter. Easing inflationary pressures and record-high remittance inflows spell good news for consumption in the quarter, despite an uptick in the unemployment rate in April. Moreover, consumer confidence hit a year-to-date high in May. Manufacturers, on the other hand, were more distressed by political uncertainty surrounding the upcoming 1 July general elections, as output metrics contracted in May—even the recent weakening of the peso has worked in their favor. Concerns surrounding NAFTA negotiations shook the peso in recent weeks after talks hit a standstill and the U.S. slapped Mexico with USD 3 billion in tariffs on steel and aluminum imports. Meanwhile, an expected Andrés Manuel López Obrador victory in next month’s presidential vote has exacerbated uncertainty over the future of the trade pact.
Tighter domestic and U.S. labor markets, ebbing inflationary pressures and firmer credit growth should support household spending this year. Healthy factory output in the U.S. should bolster manufacturing exports, while a successfully renegotiated NAFTA would likely shield fixed investment growth. FocusEconomics analysts expect growth of 2.2% in 2018, which is unchanged from last month’s estimate. For 2019, analysts see growth accelerating slightly to 2.3%.
ARGENTINA | Government seals USD 50 billion IMF loan
Argentina and the IMF reached a preliminary agreement on 7 June for a three-year USD 50 billion stand-by arrangement that will keep the economy afloat as the government pushes through economic reforms. While the final agreement is still subject to approval by the IMF board, the government pledged to now accelerate economic reforms, including reforming the Central Bank charter, reducing currency interventions and achieving a primary fiscal surplus by the year 2021. These measures are intended to make the economy more resilient to economic shocks and capable of achieving faster economic growth in the medium and long term. However, the tough reforms and fiscal consolidation are expected to have a negative impact on economic growth in the short term and weigh on the ongoing economic recovery. GDP is expected to have expanded solidly in the first quarter due to buoyant growth in the domestic economy.
Economic growth is expected to slow sharply from 2017’s strong expansion due to fiscal consolidation measures, restrictive credit conditions and the pass-through effect of higher inflation on private consumption. Panelists participating in the LatinFocus Consensus Forecast foresee the economy expanding 1.7% in 2018, which is down 0.6 percentage points from last month’s forecast. For 2019, growth is expected to reach 2.5%.
COLOMBIA | Business-friendly Duque set for victory in second-round presidential vote
Colombia is gearing up for the second round of the presidential race to be held on 17 June, in which right-wing candidate Iván Duque will face off left-wing contender Gustavo Petro. Duque, a business-friendly candidate, is still the favorite to clinch the presidency. On the economic front, the recovery from the oil price shock of 2014–2015 is underway. The latest release shows GDP expanded 2.2% year-on-year in the first quarter, an acceleration from the previous quarter. Average growth in both retail sales and industrial production rebounded in Q1. Retail sales picked up throughout the quarter against a steady rise in consumer confidence and low levels of inflation. Exports continued growing at a strong rate in the first quarter, albeit losing some pace from the fourth quarter. Going into Q2, consumer confidence entered positive territory for the first time in over two years in April.
The economy is expected to speed up this year, with growth being buoyed in the medium-term by expansions in oil exploration activities, which should benefit from higher oil prices. That said, reliance on oil exports will leave the economy exposed to the same kinds of external shocks that triggered a slowdown in 2015–2016. Investment in the non-oil sector will therefore be essential to boosting growth. FocusEconomics panelists expect GDP to grow 2.5% in 2018, which is unchanged from last month’s forecast, and 3.0% in 2019.
MONETARY SECTOR | Regional inflation steadies in May
A preliminary estimate for inflation, without considering the current period of hyperinflation in Venezuela, revealed that price pressures stabilized in May. FocusEconomics estimates that inflation in Latin America (excluding Venezuela) was 5.1% in May, unchanged from April’s result, which had marked the lowest print since February 2013. Higher inflation in Bolivia, Brazil, Chile, Colombia and Peru were balanced out by lower price pressures in Ecuador, Mexico, Paraguay and Uruguay.
While subdued inflation had given central banks in the region room to ease monetary policy in recent quarters, the U.S. Federal Reserve’s hiking cycle has erased the window for lower rates, sparking capital outflows from emerging market economies. In recent weeks, policymakers in Argentina, Brazil, Mexico and Peru held interest rates unchanged.
Regional inflation excluding Venezuela is seen rising by year-end, coming in at 6.1%. The forecast was revised up 0.4 percentage points from last month’s projection, largely due to a notable upward revision to Argentina’s inflation projection in light of a weak peso. In 2019, inflation is seen ending the year at 5.3%. Venezuela is experiencing an episode of hyperinflation and is not included in the aggregate.