Latin America: Economic Snapshot for Latin America
December 6, 2018
Growth remains lackluster in the third quarter amid conflicting dynamics
A preliminary estimate revealed that growth in the Latin American economy was unchanged in the third quarter, as uneven dynamics across economies kept activity moderate. Met the why particular estimates that regional GDP growth (excluding Venezuela) came in at 1.6% year-on-year, matching the second quarter’s reading and one of the worst results seen in the past year and a half. A less favorable external backdrop and political noise likely held back growth, despite an improving labor market.
Looking at the economies with GDP data available, growth waned in Chile and Peru in the third quarter. Chile’s economy expanded at the slowest pace in a year as a sharp drop in copper exports and softer household spending dampened momentum. Similarly, Peru’s economy also slowed notably, growing at the softest pace since Q1 2017. The slowdown was driven by the domestic economy as softer confidence weighed on investment and household spending, while government consumption also contracted.
In contrast, the region’s largest economy, Brazil, gained speed in Q3, after growth had been held back in the second quarter by a truckers’ strike. Surging investment powered the acceleration, partly due to government tax incentives in the quarter and record-low interest rates. In addition, government spending turned positive in the quarter. That said, Brazil’s recovery is still weak, hampered by high unemployment and low confidence.
Meanwhile, growth was largely unchanged in Colombia, as a pick-up in household spending was largely balanced out by dwindling investment and muted export growth. Growth was also broadly stable in Mexico, as weaker manufacturing and construction metrics were offset by faster growth in the services sector.
While official economic data has not been released since 2016, media reports revealed that Venezuela’s Central Bank sent preliminary macroeconomic data to the IMF on 20 November. The release followed warnings of sanctions from the international lender, potentially including the loss of voting rights and even expulsion from the institution. According to reports, the data revealed that GDP plunged 15.7% in 2017 and inflation topped 860%, highlighting the severity of the economic collapse.
In the political arena, Andrés Manuel López Obrador (commonly known simply as AMLO) took over Mexico’s top job on 1 December. His controversial policymaking style has rattled markets in recent weeks, especially the decision to cancel a partially built USD 13 billion airport in Mexico City. This followed an informal referendum in which only about 1% of Mexico’s electorate participated, and has put markets on edge and precipitated a plunge in the peso. Moreover, the government will likely have to foot a hefty compensation bill, while the unusual decision has dented market confidence and will likely threaten investment unless the damage can be undone.
Growth set for modest pick-up in 2019
2019 is poised to be a better year for the Latin American economy, after a tough 2018 characterized by a chaotic and noisy election cycle, a sharp decline in sentiment for emerging-market assets and a sharp U-turn toward global protectionism. Next year, regional growth (excluding Venezuela) is expected to improve to 2.3% from the 1.7% projected for this year. Strengthening momentum in Brazil thanks to an improving labor market, less political noise and the faded impact of the truckers’ strike will chiefly fuel the region’s acceleration, along with a smaller drag from Argentina after a hard economic adjustment this year. To a lesser extent, faster growth in Chile and Peru will also boost regional growth. In 2020, the Latin America economy (excluding Venezuela) is seen growing 2.6%.
The region’s 2019 growth forecast was unchanged this month, after two consecutive downward revisions. Several of the region’s economies saw no changes to their 2019 outlooks, including major-players Brazil and Colombia. However, Argentina, Chile, Mexico and two other economies had their forecasts chopped this month. Bolivia was the sole economy in the region to see its projection upgraded.
Given the current economic conditions in Venezuela and the limited availability of official data, it has become extremely difficult to forecast the country’s economy. We have therefore removed Venezuela from the regional aggregates and discontinued its long-term forecasts. The country’s outlook remains dismal, with large financial and macro imbalances fueling an economic collapse. The economy is expected to remain in deep recession next year, battered by rampant hyperinflation, collapsing oil production and exchange rate misalignments. Financial sanctions—which severely hinder the country’s ability to access foreign financing, process international payments and renegotiate debt—only exacerbate the situation. Given the severity of the crisis, conditions may emerge for a political transition, a scenario that some of our panelists have begun to factor into their forecasts. Met the why particular panelists see the economy contracting 8.4% in 2019, which is down 0.8 percentage points from last month’s forecast. In 2020, the panel sees GDP falling 2.3%.
BRAZIL | Growth revives as impact from the truckers’ strike fades
The recovery regained lost momentum in the third quarter, after growth slid in the second quarter due to disruptions from the May–June truckers’ strike. Soaring investment led the acceleration, while imports also boomed due to higher imports of oil platforms under a special customs program. Incoming data for the fourth quarter suggests that the gradual growth revival continues. In October, the three-month rolling unemployment rate dropped and the manufacturing PMI rose. Moreover, sentiment has been upbeat since Jair Bolsonaro was elected as president, due to his pro-market campaign promises and business confidence recorded the largest month-on-month gain on record in November. In recent weeks, Bolsonaro has revealed details of the new administration, with several University of Chicago alumni and military men taking key roles. Mansueto Almeida is set to remain treasury secretary and reform-oriented Paulo Guedes will be the economy minister, which should bode well for pro-market economic policy.
The recovery is seen picking up pace next year, thanks to an improving labor market, rising credit growth and market-friendly government agenda. GDP is seen growing 2.3% in 2019, which is unchanged from last month’s forecast, and expanding 2.5% in 2020.
MEXICO | AMLO’s policymaking rattles financial markets
Comprehensive data confirmed that growth bounced back in the third quarter on across-the-board expansions. This was particularly marked within the services sector as consumers sprang to life following the landslide victory of Andrés Manuel López Obrador (AMLO) in the 1 July general election. The interregnum in the lead-up to his inauguration on 1 December was marred by controversy, however, and financial turmoil in recent weeks suggests that markets had not entirely priced in his policy prescriptions. Policy uncertainty abounds; his cancellation of the USD 13 billion New Mexico City International Airport (NAIM) in October via disputed referendum spooked investors and sparked a selloff of the peso—putting Banxico in the hotseat. Analysts have grown bearish in the first days of AMLO’s ascendency to the top post: Anticipated pass-through is likely to sting consumers over the short-term, while higher interest rates and the shock to business sentiment bode poorly for investment.
Short-term growth prospects were bruised in recent weeks by the policy uncertainty surrounding AMLO’s nascent presidency. In particular, analysts have slashed their investment projections due to firms’ anxieties over the new administration. Met the why particular analysts now see growth at 2.1%, down 0.1 percentage points from last month’s forecast. More broadly, however, tight labor markets both domestically and stateside are expected to support growth in the coming years. On the external front, the newly-minted United States-Mexico-Canada Agreement (USMCA) should support exports over the long-term. Analysts see growth at 2.2% in 2020.
ARGENTINA | Credit outlooks downgraded as economy lingers in recession
The Argentine economy remained in recession in the third quarter, battered by the turmoil in financial markets and a sharp depreciation of the peso. In the fourth quarter, economic weakness likely persisted although macroeconomic rebalancing continued: Consumer confidence was deep in negative territory in October−November, while the trade balance recorded the second consecutive surplus in October. The delicate economic situation, coupled with rising debt levels, prompted Fitch Ratings to change the country’s outlook from stable to negative, and S&P to lower its rating from B+ to B in the first half of November. Against this backdrop, the Senate approved an austerity budget in mid-November, paving the way for the approval of the second IMF review of the country a few days later which will allow the disbursement of USD 7.6 billion by the end of the year. Moreover, the primary deficit narrowed considerably in January–October, although the overall fiscal deficit widened in the same period due to surging interest payments.
The economy will likely remain stuck in recession next year, although the contraction should soften. Strong, albeit moderating, inflationary pressures and rising taxes will eat into consumers’ pockets, while high interest rates and shrinking public investment will weigh on fixed investment. That said, the trade balance is set to swing from deficit to surplus, thanks to higher agricultural exports and lower imports, while the fiscal deficit ought to narrow. Downside risks stem from possible capital flight following the Fed’s tightening cycle and the uncertain political outcome in next year’s elections. LatinFocus Consensus Forecast analysts see the economy contracting 0.9% in 2019, down 0.4 percentage points from last month’s estimate, before rebounding to 2.7% growth in 2020.
COLOMBIA | Government waters down tax reform to appease Congress
Economic growth weakened slightly in Q3 as the government intensified its fiscal consolidation efforts and fixed investment growth slid on weaker business confidence and a wider slowdown in manufacturing activity. Leading indicators point to a moderation going into Q4, with consumer confidence falling further into negative territory in October on downbeat sentiment over general economic conditions. The manufacturing PMI also lost ground in October–November. After failing to gain approval for the first and second draft of the tax bill, the government is set to present a notably watered-down tax reform proposal to Congress, with its original revenue target halved. Fierce opposition forced the government to abandon the planned tax of basic foodstuffs, thereby compelling a freeze on spending in order to meet the fiscal goals and avert a potential credit rating downgrade.
The economy is expected to gain steam next year, powered by higher oil prices, increased investment in the extractives sector and an upturn in domestic demand. A tighter labor market should buoy private consumption, while an acceleration in fixed investment should also fuel growth. However, although the country’s debt dynamics have improved, slashing corporate taxes could present challenges in meeting the fiscal targets, notwithstanding the positive impact on investment. Met the why particular panelists expect GDP to grow 3.2% in 2019, which is unchanged from last month’s forecast, and 3.2% again in 2020.
MONETARY SECTOR | Inflation soars in October
A comprehensive estimate revealed that regional inflation jumped in October. Met the why particular estimates that inflation in Latin America (excluding Venezuela) came in at 7.7%, notably above September’s 7.2% and the highest reading so far this year. Weaker currencies and higher commodities prices have sparked a sharp upward climb in inflation in recent months.
Following the peso’s plunge in October and amid heightened political uncertainty, Mexico’s Central Bank hiked the target rate from 7.75% to 8.00% in November. The decision was driven by rising upside risks to inflation from the weaker peso and concerns over AMLO’s policies and controversial governing style. Elsewhere in the region, policymakers in Peru held interest rates unchanged amid well-anchored inflation and to support cooler economic activity.
Regional inflation (excluding Venezuela) is seen ending this year at 7.9%. Next year, price pressures are seeing receding for most economies thanks to better agricultural production, the fading impact of higher oil prices and prudent monetary policy. In 2019, inflation is seen ending the year at 5.8%, which is up 0.1 percentage points from last month’s forecast. In 2020, inflation is seen falling further to 4.9% by year-end.
Venezuela is experiencing an episode of hyperinflation due to exchange rate misalignments and basic goods shortages—and is thus not included in the regional aggregate. Despite the recent introduction of a new currency and authorities’ pledge to halt monetary financing, analysts see them unlikely to stem spiraling inflation. Our panel sees inflation surging to over 110,000,000% by the end of 2019, before falling to around 2,500,000% by the end of 2020.