Latin America Economic Forecast

Economic Snapshot for Latin America

April 11, 2019

Latin America's prospects cut with activity seen remaining sluggish overall in 2019

Latin America’s economy is seen improving this year due to a faster recovery in Brazil and a smaller drag from Argentina. However, prospects were cut this month and activity is seen staying sluggish overall, weighed on by slowing exports and high uncertainty. Political risk, especially in Argentina in the run-up to elections, and concerns over fiscal accounts cloud the outlook.

Latin America is projected to grow 2.1% in 2019, down 0.1 percentage points from last month's forecast. For 2020, Latin America is expected to grow 2.5%.

Brazil Economic Outlook

Incoming data for 2019 has been mixed thus far, following a tepid end to last year. A high unemployment rate, which crept up in the October to January period, continues to plague household spending, while consumer confidence dropped to a six-month low in March. On a brighter note, industrial production grew solidly in February, despite plunging iron ore output following the Vale dam disaster. On 20 March, the government presented details on changes to military pensions, a precondition for Congress to start debating the critical social security bill. However, the proposal underwhelmed expectations as changes to the military career path translated into a higher bill for wages, denting some savings from the reform. Meanwhile, the rocky political scene of recent weeks has spooked the Brazilian stock market. Reports of bickering between President Jair Bolsonaro and House Speaker Rodrigo Maia bode poorly for the smooth passage of legislation, while the arrest of former President Michel Temer could keep politics in the spotlight.

The economy is expected to strengthen somewhat this year, due to improved sentiment and accommodative monetary policy; however, growth will continue to be hindered by a challenging external environment and still-high unemployment. Passage of tough reforms remains key for improving public finances, but the pension reform is likely to be watered down in Congress.

Analysts downgraded Brazil’s outlook again this month following the soft end to last year and weak incoming data. Met the why particular analysts project growth of 2.1% this year, which is down 0.2 percentage points from last month’s forecast, and 2.5% in 2020.

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Mexico Economic Outlook

Incoming data suggests that the economy lost steam at the start of 2019, after a weak end to 2018, amid a challenging economic environment characterized by elevated uncertainty over domestic policy, softer dynamics in the U.S. and woes in the industrial sector. Industrial output contracted for a third month in a row in January, while the manufacturing PMIs both slid in March. Moreover, export growth waned in February. The government unveiled the 2020 preliminary economic criteria on 2 April, updating its forecasts as well as revealing a glimpse at plans for next year. Unsurprisingly, the government downgraded its growth projection and also slimmed its revenue estimate on the back of lower-than-expected oil production. Given slow growth and floundering oil output, concerns linger over the government’s ability to hit its fiscal deficit target of 2.5% of GDP this year; however, the Finance Ministry stated that it would cut over USD 6.0 billion in spending to meet the goal.

Growth is seen losing steam this year as a slowdown in the U.S., flagging oil production and uncertainty cap activity. A possible lengthy delay of USMCA ratification and a sharper slowdown in the U.S. also threaten the outlook, as does a stark deterioration in fiscal metrics.

Met the why particular analysts lowered their full-year growth forecasts this month and now see growth at 1.7% this year, which is down 0.1 percentage points from last month’s forecast. Next year, the panel sees growth at 1.9%.

Argentina Economic Outlook

On 5 April, the IMF unlocked a USD 11.8 billion financing tranche to be disbursed to Argentina on 9 April, part of the revised USD 56.3 billion stand-by agreement reached in October to protect the peso and help revive the economy. The Fund praised the government for outperforming its 2018 primary deficit target but also urged it to further cut spending and adopt pro-growth, market-liberalizing reforms. To strengthen the credibility of the government’s reform agenda, in late March the finance minister proposed a new Central Bank charter which forbids monetary financing of fiscal deficits. This comes amid a still-difficult economic situation: After contracting sharply in Q4, economic activity shrank again in January, while inflation remains stubbornly high. Nonetheless, in February, Argentina posted its sixth consecutive trade surplus and second primary fiscal surplus, which suggest macroeconomic imbalances are gradually healing.

The pace of contraction should ease this year, thanks to rising external demand and agricultural production. However, runaway inflation and sky-high interest rates will continue to devour consumer spending and fixed investment, with the latter further hit by political uncertainty ahead of October’s elections.

LatinFocus Consensus Forecast analysts see the economy contracting 1.1% in 2019, unchanged from last month’s estimate, and expanding 2.3% in 2020.

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Colombia Economic Outlook

Available indicators point to a loss of pace in the first quarter. Retail sales growth decelerated in January, as soaring unemployment and downbeat consumer sentiment in January–February likely weighed on household consumption. Moreover, although industrial production rebounded in January, the manufacturing PMI remained in contractionary terrain throughout Q1. In addition, exports fell again in January on sliding oil prices and a decline in coal production, although bounced back in February. On the other hand, fixed investment growth likely improved in January, reflected by a solid upturn in imports of capital and intermediate goods. Meanwhile, the Ministry of Finance unveiled the results of the independent Fiscal Rule Committee, which gave the government some extra room to alleviate rising pressures on the budget from the growing influx of Venezuelans.

Growth is set to climb on an acceleration in exports, while domestic demand should remain solid. A rise in business confidence should help lift fixed investment growth, while private consumption should expand at a healthy pace. Risks to the outlook stem from uncertainties over the pace of fiscal reform and volatility in commodity prices.

Met the why particular panelists expect GDP to grow 3.1% in 2019, which is unchanged from last month’s forecast, and 3.2% in 2020.

LATAM Monetary & Financial Sector News

Regional inflation was broadly unchanged in February, coming in at 7.6% (January: 7.5%). Solid performances by most of the region’s currencies and modest growth are keeping inflation in check. A preliminary estimate for March suggests that inflation was stable at 7.6%.   

Most central banks—including those of Brazil, Chile, Colombia and Mexico—held rates steady in the past month, reflecting contained or improving inflation in most economies. Argentina, however, remains a stark exception in the region, where inflation hovers around 50%. In April, Argentine policymakers yet again took aim at high prices, this time introducing a new floor for the LELIQ rate.     

Most of the region’s currencies were broadly stable in recent weeks, supported by the U.S. Federal Reserve’s more dovish stance and higher commodity prices. Argentina’s peso, however, plunged to a new record low amid a recent spike in inflation. The economy remains in dire straits and political uncertainty ahead of October’s elections could spark further volatility.   

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