Latin America: Recession persists but signs of improvement emerge
November 9, 2016
Latin America’s ongoing adjustment to low commodity prices and domestic political turbulence in each country continue to shape the region’s growth performance and its near-term outlook. An estimate produced by FocusEconomics signals that the region’s protracted economic recession persisted in the third quarter, although it is showing signs of waning. GDP is expected to have contracted 0.6% annually in Q3, which followed a 0.9% decrease recorded in Q2. The result suggests that mild signs of improvement are emerging, though economic activity in the region remains weak.
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In Brazil, data suggests that the recession continued to abate in Q3, after GDP had recorded the smallest fall in one year in Q2. In Argentina, which has also been in recession, recent economic indicators suggest that output is stabilizing. In Mexico, preliminary data showed that the economy continued to expand in Q3, yet the pace of expansion was the weakest in over two years and the economy remains in low gear. The Peruvian economy, on the other hand, continued to expand at a solid pace, driven mainly by supply-side factors such as the maturing of large mining projects. Chile and Colombia, which were former regional strong points, showed signs of losing momentum.
Decline in regional growth will bottom out this year
In an environment of low commodity prices, subdued global growth and financial market volatility, Latin America is projected to contract 0.6% this year after having stagnated in 2015. This month’s outlook was cut by 0.1 percentage points relative to last month’s LatinFocus Consensus Forecast. Economic growth is expected to bottom out this year and to rebound strongly to 1.9% in 2017, as the global economy gradually picks up momentum and global trade strengthens.
Downside risks to the outlook continue to loom on the horizon. External risks may materialize in the form of weak growth in the U.S. economy and China’s transition to a consumption-led economy, which could delay the region’s export recovery. Financial risks may result from the upcoming U.S. elections, the market reaction to the likely Fed interest rate increase in December, and signs that monetary policy in other developed economies may become less accommodative.
Looking at the countries in the region, economists maintained the 2016 growth projections for 7 of the 11 economies surveyed, including Brazil and Mexico—which together account for nearly 60% of the region’s economy. Ecuador and Paraguay were the only economies for which analysts raised their projections, while growth prospects for Argentina and Venezueladeteriorated again this month.
ARGENTINA | Positive signs start to emerge
The economy remains in deep recession as a result of the government’s austerity measures, declining real wages and weak demand for Argentinean goods. While the economy is expected to have contracted again in Q3 following Q2’s 3.4% annual decline, some positive signals have started to emerge in recent months. The decline in economic activity softened in August and the upward trend in consumer confidence continued in October. Moreover, international reserves jumped to a three-year high in October due to improved business sentiment. The pace of fiscal consolidation, however, remains a key challenge for President Mauricio Macri’s administration. Although in October the government reinstated a gas subsidy cut after the original had been temporary annulled by the Supreme Court in August, the slash introduced this time around was smaller and will be implemented more gradually.
This year, the economy has been plagued by the government’s austerity measures and a weak external sector. In 2017, however, the country will return to growth due to revived public spending in the wake of the 2017 general election and to the recovery in Brazil. The panel cut their GDP forecast for this year by 0.2 percentage points and they now expect the economy to fall 1.8%. Analysts see the economy rising 3.2% next year.
BRAZIL | Lower house approves cap on spending
Brazil’s battered economy is slowly heading towards a recovery. Monthly data suggest that the recession continued to abate in Q3 although data remains poor. Industrial production rebounded in September and the current account deficit moderated, but retail sales continued to fall in August. Leading indicators for Q4 continue to show some improvement: consumer confidence rose in October and the manufacturing PMI recorded the best result since January. Meanwhile, the government is making progress on fiscal reforms. The constitutional spending cap was passed in the lower house last month and is set to face two votes in the Senate before year-end. The government also stated its intention to pass a pension reform in H1 2017, although it has yet to reveal details of the bill. While this progress is promising and points to a stabilization of the political environment, the political scene remains complicated. In October, former house speaker Eduardo Cunha—a prominent member of President Michel Temer’s party—was arrested over corruption charges.
The decline in GDP has already hit rock bottom but austerity measures, rising unemployment and tight credit conditions will keep the economy in a profound recession this year. FocusEconomics Consensus Forecast panelists expect that the economy will drop 3.2% in 2016, which is unchanged from last month's projection. Next year, the panel expects GDP growth to rebound to a 1.0% expansion.
COLOMBIA | Government set to face opposition to fiscal reform
In Q3, Colombia’s economy likely remained on a weak footing, following Q2’s sharp deceleration. In September, exports shrank 5.6% annually and consumer confidence remained in pessimistic territory. In August, retail sales contracted for the first time in five months, while industrial production rebounded due to a base effect following the end of a truckers’ strike. To address the struggling economy and its effects on public finances, the government presented its ambitious fiscal reform to Congress on 19 October. It includes a widening of the personal income tax base, a value-added tax hike and a simplification of the corporate tax. The reform is designed to compensate for the shortfall in oil income and aims to increase government revenues back to pre-oil slump levels by 2022.The proposal will likely face strong opposition in Congress after the government-backed peace deal was rejected at the ballot box.
The ongoing oil slump along with July’s stronger-than-expected truckers’ strike is weighing heavily on Colombia’s economic outlook. Analysts expect the economy to grow 2.1% in 2016, which is unchanged from last month’s forecast. For 2017, the panel projects economic growth of 2.6%.
MEXICO | Economic growth shifts into lower gear
In Q3, Mexico’s economy posted its worst year-on-year growth result in over two years, according to preliminary data. Although overall economic activity continues to be supported by the agricultural and service sectors, an extremely poor performance from the industrial sector dragged substantially on growth in the third quarter. Heading into the final quarter of the year, data suggest that the economy is moving forward in slow motion. According to the latest round of PMIs, activity in the manufacturing sector was sluggish as both the IMEF manufacturing indicator and the manufacturing PMI slipped in October. The peso suffered strong volatility in the week prior to the U.S. presidential election as Hillary Clinton’s advantage over Donald Trump narrowed, increasing the likelihood of a tight result.
Economic growth is gradually losing dynamism due to a variety of factors. The government has cut spending, manufacturing production remains weak, and political uncertainty and overall insecurity in the country are affecting consumer confidence. As a result, the analysts we surveyed this month left the country’s outlook for this year unchanged and expect the economy to grow 2.1%. Next year, the economy is projected to increase 2.3%, which is down 0.1 percentage points from last month’s estimate.
INFLATION | Regional inflation drops in September after 17 months on the rise
Due to a more favorable evolution of currencies and a negative output gap, inflation in the region is showing signs of moderation. A complete set of data shows that in September, inflation in Latin America fell for the first time since March 2015. According to an estimate elaborated by FocusEconomics, the region’s inflation was 24.1% in September, which was down from the 25.3% recorded in August. Not taking into account the exceptionally high inflation in Venezuela, Latin America’s inflation fell to 9.4% in September from 9.6% in August.
Inflation is projected to rise toward the end of the year and analysts expect it to end 2016 at 26.8%. This month’s forecast was revised down from the 28.1% expected last month. Latin America’s inflation forecast excluding Venezuela is projected to end the year at 9.1%. Next year, forecasters expect overall inflation in the region to come in at 25.5%. Stripping out the inflationary effects from Venezuela, inflation in Latin America is expected to end 2017 at 6.2%.
Written by: Ricardo Aceves, Senior Economist