Latin America: Poor performance in the South weighed on growth last year
March 15, 2017
After five years of deceleration, economic growth in Latin America turned negative in 2016. Comprehensive data showed that the region’s GDP contracted 0.8% last year, after having virtually stagnated in 2015. Deep and prolonged recessions in Brazil and Venezuela, and a notable slump in total output in Argentina and Ecuador, largely explain the aggregate performance in the region. While these four countries contracted in 2016, the region suffered a generalized slowdown. This not only revealed its exposure to external shocks, such as the slump in commodity prices and heightened exchange rate volatility, but also its structural weaknesses, which undermined the region’s potential output growth.
Looking at the countries that led last year’s regional contraction, Brazil’s economy experienced the longest and deepest recession in many decades. The latest data for Q4 2016 showed that GDP contracted more sharply than expected, which meant the country declined 3.6% overall in 2016, after a fall of 3.8% in 2015. In Argentina, available data suggest that economic activity picked up strongly at the end of 2016, providing further evidence that the recovery is finally under way. The economy is recovering from sharp adjustments in monetary, fiscal and exchange-rate policy initiated by the new government led by Mauricio Macri upon taking office in December 2015. These adjustments started to bear fruit by late 2016 in the form of dampening inflationary pressures, the aim being to pave the way for a return to a more sustainable growth path.
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Venezuela’s economic depression continues to drag on the region’s growth. In the oil-rich economy, crude production fell for a fifth consecutive year in 2016, to a nearly 30-year low, according to data from the International Energy Agency. Lower oil output, also the result of the severe economic crisis, and a shortage of foreign currency are causing a variety of difficulties with little sign of an upturn this year. Ongoing disruption in Venezuela’s productive base and a collapse in household spending mean that, after an acute GDP contraction in 2016—estimated at 12.2%—, the economy is projected to continue shrinking this year. Meanwhile, in Ecuador, Rafael Correa will hand over power to an elected successor in May. This follows a decade of political stability during which the economy has been transformed with the help of the oil windfall from the commodity boom, in order to promote economic development and social inclusion. However, the sustainability of the model has been called into question given the poor economic results of the past two years and inquiries into corruption, while Correa’s commitment to freedom of speech will cloud his legacy.
Sluggish growth in Latam’s two giants will constrain the expansion
Following a regional contraction of 0.8% in 2016, Brazil’s emergence from a difficult two-year recession and an economic rebound in Argentina and Ecuador will help to lift the regional growth rate back into positive territory in 2017. However, growth will continue to disappoint as Latin America’s two largest economies struggle. Economists expect growth of just 0.6% for Brazil and 1.5% for Mexico in 2017, which will limit Latin America’s growth outlook for this year. Panelists surveyed this month project that the region’s GDP growth will pick up to 1.5% this year, down from the 1.6% expected last month. Going forward, regional economic activity should gain momentum and expand 2.5% in 2018.
Brazil’s economy is seen beginning its recovery in the first quarter and gaining momentum later on, while Argentina has already shown signs of an incipient upturn since Q4 2016. Although social and economic ties between the U.S. economy and countries in Latin America will continue to exist, the risk of tensions and a deterioration in relations with the Trump administration will remain high. U.S. policies pursued by President Trump in areas such as trade and immigration will stay in the spotlight, particularly in Mexico. Mexico and the U.S. traded half a trillion dollars’ worth of goods last year, many of which were manufactured goods. President Trump has vowed to move quickly to renegotiate NAFTA and is pushing U.S. manufacturers to relocate jobs to north of Mexico’s border. Although the U.S.’ exact goals for renegotiating NAFTA remain unclear, it is generally expected that the U.S. will try to renegotiate parts of NAFTA rather than tearing the whole agreement to shreds.
This month’s cut to the region’s economic outlook was driven by analysts’ downgrading of the GDP growth forecasts for Argentina, Chile, Mexico, Peru, Venezuela and the sub-region of Central America and the Caribbean. The outlook for the rest of economies surveyed in this report was left unchanged compared to last month.
ARGENTINA | Recovery is underway
A sluggish economic recovery is underway, with December’s monthly indicator for economic activity recording the smallest drop in 2016. In January, industrial output benefited once again from upbeat momentum in the automotive sector, while improving regional trade flows continued to boost demand for Argentine goods abroad. These encouraging signs of recovery, however, are hardly being felt by Argentineans. Multi-faceted policy challenges, subdued household purchasing power, numerous hikes to utility fees and arduous wage negotiations with trade unions are all weighing on consumer sentiment, which plummeted to an over two-year low in February. On 22 February, Treasury Minister Nicolas Dujovne announced new targets for the primary fiscal balance for the remainder of President Macri’s term and presented a new fiscal framework that, in a bid to make fiscal policy more credible, includes quarterly targets and promises enhanced reporting of monthly data.
Momentum will continue to build as economic activity picks up and inflation decelerates, benefiting households and pushing up private consumption. In addition, as Macri’s economic reform drive begins to bear fruit, upbeat business sentiment will provide a boost to fixed investment. Nonetheless, panelists have revised downwards their forecasts for this year, weighed down by uncertainty overseas and increased domestic political unrest. Analysts foresee the economy expanding 2.9% this year, which is down 0.1 percentage points from last month’s estimate, and 3.1% in 2018.
BRAZIL | Government launches initiative to kick-start investment spending
The dynamics of Latin America’s largest economy are bleak. The economy failed to make significant gains in the fourth quarter of last year and GDP recorded another steep contraction, holding the country in its worst recession on record. High unemployment, austerity measures and tight monetary policy are hampering a recovery and data for the first quarter of 2017 point to muted gains. Industrial output shrank in January and business confidence fell in February, while consumer confidence and the manufacturing PMI both improved in the same month. In a bid to support the economy, the government launched an infrastructure concession program this month that seeks to kick-start investment for infrastructure. The program will begin on 16 March with auctions for a number of the country’s airports and hopes to raise over USD 14 billion in new investments.
GDP is poised to return to growth this year thanks to lower inflation, improved confidence and a less-tight monetary policy. However, the improvement will be marginal due to high unemployment and austerity measures and political noise remains a risk to the outlook. Analysts see GDP growth at 0.6% in 2017, which is unchanged from last month’s forecast. The recovery is seen gaining speed in 2018 and GDP should increase 2.3%.
COLOMBIA | Government unveils economic plan
While growth gained some momentum in Q4 thanks to higher private consumption, the economy expanded at the slowest pace last year since 2009, dragged down by the collapse in oil prices. Despite 2016’s disappointing result, Colombia’s economy still managed to outperform most other commodity-dependent economies in the region, supported by strong total consumption and a weaker peso, which bolstered net exports. In response to Colombia’s stagnant growth, President Juan Manuel Santos launched the final economic plan of his term in office on 14 February. The plan, called Colombia Repunta, envisages a significant increase in government spending to improve the country’s infrastructure. The government expects the plan to add 1.3 percentage points to GDP growth and create almost 800 thousand jobs.
GDP growth will experience a mild acceleration this year thanks to an ambitious infrastructure plan and an accommodative monetary policy. However, the overall health of the Colombian economy will remain closely linked to the evolution of oil prices. Analysts expect the economy to grow 2.4% in 2017, which is unchanged from last month’s forecast. For 2018, our panel projects economic growth of 3.0%.
MEXICO | Economy is on quicksand despite solid fundamentals
Mexico’s economy is in the frontline of the new U.S. administration’s veer towards protectionism and anti-immigration policies and this is causing huge uncertainty and concern in the country, given its dependence on the U.S economy. Despite relatively solid macro fundamentals, economic growth disappointed last year and recent data indicate the country is walking on quicksand at the beginning of the year. Whatever position the Trump administration eventually adopts regarding trade and immigration policies towards Mexico, it will take several months for any policy changes to actually materialize. This uncertainty in itself will affect business and investor confidence, with investment suffering a negative shock. Already shaken by the fuel price increase in January, consumer confidence is also likely to remain low, hurting private consumption.
Under these conditions, and since economic policy will remain restrictive this year, Mexico’s growth prospects are eroding. Met the why particular’ Consensus Forecast for 2017 GDP growth was cut by 0.1 percentage points to 1.5% in our March survey, while the projection for 2018 was left unchanged at last month’s 2.1%.
MONETARY SECTOR | Currencies stabilize and inflation (ex-Venezuela) will fall this year
A change in risk appetite was an important factor in the rally observed in 2016 in several Latin American currencies—with the exception of the Mexican peso—which recovered part of the losses sustained in the sell-off of 2014 and 2015. Moreover, a renewed inflow of portfolio investment, increased foreign direct investment inflows and higher remittances have supported many of the region’s currencies. This year, Latin American currencies, particularly in larger countries, are expected to weaken slightly against the U.S. dollar due to expectations of higher U.S. interest rates.
Inflation in the region as a whole ended 2016 at 29.6%, which marked the highest rate in two decades. Without considering the exceptionally high inflation in Venezuela, Latin America’s inflation ended last year at 8.8%.
Venezuela is experiencing an episode of near hyperinflation and, considering its effects, inflation in Latin America is projected to end this year at 33.5%. Not taking into account the effects of hyperinflation in Venezuela, Latin America’s inflation is expected to fall to 6.5% this year. Going forward, economic experts project regional inflation (ex-Venezuela) to fall further to 5.4%, while if we keep Venezuela in the regional aggregate, inflation in the region is seen at 25.1%.
Written by: Ricardo Aceves, Senior Economist