Latin America: GDP expands at fastest pace since Q1 2014
September 13, 2017
Comprehensive data from Statistical Institutes across the region confirms that the recovery in the Latin American economy strengthened notably in Q2. Regional GDP expanded 1.1% annually, which was above the 0.8% increase in Q1 and the best result in over three years.
A turnaround in Brazil, Latin America’s largest economy, was chiefly behind the region’s growth acceleration. A one-off government decision to allow workers early access to a severance fund helped boost private consumption in Q2, which is also benefiting from tailwinds of falling inflation and a looser monetary policy. Chile’s economy also contributed to the region’s uptick as growth picked up speed in Q2. Rising sentiment and higher purchasing power boosted household spending in the quarter, which offset falling investment and a poor performance in the external sector.
Meanwhile, economic momentum lost steam in the region’s other heavyweight, Mexico. GDP growth slowed in Q2 amid a downswing in construction-related activity and persistent weakness in mineral and quarrying output. However, solid export volume to the U.S. supported the all-important manufacturing sector and kept activity resilient overall.
The manufacturing sector and exports to the U.S. were likely at the forefront of policymakers’ minds as renegotiations of NAFTA officially began in August and continued in September. Although officials stated that some progress has been made, a number of difficult issues still need to be tackled, including the topic of labor market rules. Any major changes to the free-trade agreement will likely have ripple effects in Mexico’s economy; however, the fact that officials are trying to complete negotiations before Mexico holds elections in 2018 has caused most analysts to speculate that there will only be minor tweaks to the agreement’s framework. Nevertheless, uncertainty is high over the future of the agreement and relations between the U.S. and Mexico, and any incoming news will likely result in volatility in Mexican assets.
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Clouds gather over region’s outlook
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The regional growth estimate for 2017 was left unchanged from last month, although downside risks to growth prospects are pronounced. LatinFocus Consensus Forecast analysts expect that the region will return to growth in 2017 and expand 1.4%, after a 0.7% fall in GDP last year. Driving the region’s acceleration is a rebound in Brazil as the economy stabilizes following a perfect storm of high inflation, low commodity prices and depleted government revenues. However, risks to Brazil’s outlook remain high. While the government has made some progress in passing key reforms, political noise is loud and critical legislation is still pending. Moreover, additional corruption charges are expected to be leveled against the country’s president in the coming weeks, which will likely take over the legislative agenda at the expense of reforms. In 2018, Latin America’s economy is seen gaining pace and GDP is expected to rise 2.4%.
This month’s unchanged outlook reflects stable growth prospects for 5 of the 11 economies surveyed for this report, including Argentina, Chile and Peru. However, growth prospects improved in Brazil, Ecuador, Mexico and Uruguay. Colombia’s and Venezuela’s outlooks were downgraded.
BRAZIL | Tentative recovery takes hold in Q2
Recently-released data indicates that GDP grew for the first time in over three years in Q2, confirming that the economy has turned a corner. The upturn was largely due to tailwinds to private consumption from falling inflation and a one-off decision allowing workers to make early withdrawals from a government severance fund. Export growth also accelerated in the quarter. The recovery remains tentative despite the good news, and incoming data for Q3 is patchy: consumer confidence fell to a seven-month low in August, while the manufacturing PMI recovered some lost ground. On the political front, developments have also been mixed. In September, a critical reform to reduce subsidized lending for businesses from government-owned bank BNDES was passed, which faced heavy opposition from industry leaders, but should help correct government finances and improve the effectiveness of monetary policy. While the reform is a win for the government, austerity measures are still facing an uphill battle, as underscored by the government’s easing of budget targets. Unable to convince legislators to support tax hikes, the government announced it would revise upwards its primary deficit targets for all years through 2020.
Battered government finances and an uncertain outlook for reforms given the fragile political environment are threatening the economic recovery, despite a positive Q2 GDP print. Local media reported that President Michel Temer is likely to face another corruption charge in the coming weeks, which could push reforms to the back burner. Our panelists see GDP growing a measly 0.6% in 2017, which is up 0.2 percentage points from last month’s forecast. Next year, the recovery is seen gaining speed and GDP increasing 2.2%.
MEXICO | Incoming data is bright as NAFTA talks get underway
The economic panorama remains upbeat, with better-than-anticipated growth continuing into the start of the third quarter, even amid myriad challenges, both domestic and external. The manufacturing PMI logged its second-best reading in three years in August, and consumer sentiment trended higher in the same month. However, household spending has started to feel the pinch of multi-year-high inflation and weakening credit growth, with retail sales nearly running aground at the close of the second quarter. Meanwhile, the second round of NAFTA renegotiation talks came to a close in early September. The first two rounds have shown little in terms of progress, and talks are expected to last at least through the end of this year. Nonetheless, time is of the essence as election cycles draw near in both the U.S. and Mexico, which suggests that changes to NAFTA will be only minor and therefore easy to agree on.
Economic activity growth is expected to be weaker in the second half of the year due to dwindling purchasing power growth among consumers and still-subdued public capital expenditure. In addition, analysts remain wary of the short- and long-term effects an adverse renegotiation of NAFTA would have on the country’s outlook. Our panel expects GDP to grow 2.1% this year, which is up 0.1 percentage points from last month’s forecast, and 2.2% in 2018.
ARGENTINA | Government finances improve as economy gains traction
A strengthening economic recovery is on the horizon for Argentina. Economic activity recorded its best performance in nearly two years in June, and in July industrial production maintained its momentum with a third consecutive month of year-on-year increases. Consumer confidence responded with a sharp improvement in August, particularly on optimism about the country’s short-term economic prospects. The peso also strengthened towards the end of August, following the results of a mid-term legislative primary election held on 13 August that were seen as favoring business-friendly President Mauricio Macri as he heads towards October’s parliamentary election. On the fiscal front, the year-to-date primary fiscal deficit reached 1.7% of GDP in July, making the government’s target of a 4.2% deficit for 2017 seem more feasible.
Buoyed by business-friendly reforms adopted by the Macri administration, the economy is expected to rebound this year and next. Fixed investment should recover due to an improved business environment and higher public infrastructure spending, while household spending should benefit from declining inflation and rising wages. Analysts foresee the economy expanding 2.6% this year, unchanged from last month’s forecast, and 2.9% in 2018.
COLOMBIA | Economy accelerates slightly in Q2
The economy accelerated only marginally in Q2 from the tepid growth recorded in Q1 as still-weak domestic demand once again prevented a definitive expansion. In fact, the uptick in total consumption was mostly propped up by a jump in government stimulus, which acted as crucial support for the economy as household spending again failed to fully recover. That said, bright spots in Q2 included a rebound in fixed investment—which is expected to contribute positively to growth this year after a dismal 2016—and another moderation in the contraction of exports as the mining sector further adjusted to low oil prices. Moreover, exports jumped by more than a third in July from a year earlier and consumer confidence hit its highest level of the year, both suggesting that the turnaround anticipated for H2 could already be underway.
Following a dismal Q1, reviving fixed investment—partially driven by lower interest rates—and additional fiscal stimulus are expected to support economic growth this year. Although low oil prices will continue to cloud the outlook for this year, the government’s renewed commitment to fiscal responsibility bodes well for the economy’s medium-term health. Our panelists expect GDP to grow 1.8% this year, which is down 0.1 percentage points from last month’s forecast, and 2.7% next year.
MONETARY SECTOR | Inflation in region (not counting Venezuela) stabilizes in August
A preliminary estimate suggests that inflationary pressures in Latin America—without considering the current period of near hyperinflation in Venezuela—were stable in August. The FocusEconomics regional estimate showed that Latin America’s inflation (excluding Venezuela) was 5.4% in August, matching July’s result. The print largely reflected that higher readings in most countries in the region were offset by lower inflation in Brazil, which hit a new 18-year low.
Venezuela is experiencing an episode of near hyperinflation; if we include it in the aggregate, inflation in Latin America is projected to end this year at 38.2%. Excluding Venezuela, Latin America’s inflation is expected to be 6.3% this year, down a notch from last month’s estimate. Going forward, analysts project regional inflation excluding Venezuela to fall to 5.2% in 2018 (35.2% including Venezuela).
Written by: Angela Bouzanis, Senior Economist