Latin America: Economic Snapshot for Latin America
February 7, 2018
Economic backdrop improves as political cycle advances
Incoming data suggests that the Latin America economy ended 2017 on a healthier note, with regional GDP projected to have grown 2.3% annually in Q4. If confirmed, the reading would mark the strongest growth rate since Q1 2014 and a notable pick-up from Q3’s 1.7% expansion. The region’s economic backdrop has improved in recent months as the long-awaited recovery takes hold and growth benefits from improving confidence, accommodative financial conditions, rising prices for commodities and solid global demand.
The building momentum is being chiefly driven by stronger activity in major player Brazil. Inflation fell to historic lows in Q4, allowing the Central Bank to aggressively ease monetary policy to boost growth. Moreover, the unemployment rate edged down in the quarter, and industrial production growth hit an over two-year high in December. In addition, a preliminary estimate of GDP revealed that the Mexican economy gained steam in Q4, although growth remained weak overall. Robust demand from overseas and healthy services activity spurred growth; however, high inflation, tighter monetary conditions and fiscal activities weighed on momentum.
While the recovery has been welcome news for the region, growth is still moderate overall, and economic slack persists. To kick growth into a higher gear, it is critical that policymakers focus on addressing structural issues and macroeconomic imbalances in their respective economies. In the face of these economic challenges, the region’s busy election cycle and political developments are taking centerstage. Political developments have in recent weeks evolved in a broadly favorable way for the regional economy.
In Chile, president-elect Sebastián Piñera, who was elected last December, presented the members of his cabinet on 23 January. Felipe Larraín will return to the role of finance minister, a move that market analysts have responded to positively. Larraín oversaw a period of robust growth in Chile and is viewed as a safe pair of hands for the economy. However, passing legislation will likely not be easy given the fragmented congress. Larraín and Piñera’s jobs will be more difficult this time around, due to a less favorable environment for the mining sector.
President Lenín Moreno’s political gamble paid off in Ecuador, after he consolidated power in a contentious national referendum on 4 February. Moreno received a boost to his political capital after winning sound support for all seven proposals put to vote. He won last year’s election by a slim margin, and the victory should now give him a decisive mandate to move ahead with legislation and make it easier for him to push through economic measures. The referendum also removed the possibility that former President Rafael Correa will be reelected.
Colombia will be the next Latin American nation to hold elections, with a legislative vote scheduled for 11 March. While the main event will be the presidential event in May, the upcoming vote can help gauge the mood of the electorate.
Economy not yet out of the woods
While the political backdrop in Chile and Ecuador improved somewhat, the region is still far from being out of the woods, and politics remains the biggest risk to growth. NAFTA renegotiations are clouding Mexico’s outlook, while Brazil’s 2018 election is gearing up to be turbulent, and a market-friendly outcome is far from guaranteed. In addition, Peru’s government is on shaky footing, after the Popular Force party lost its absolute majority and as corruption investigations continue. Despite the uncertain political scene, the regional economy is seen growing at a steady rate in the coming quarters. The LatinFocus Consensus Forecast for the region was lowered 0.1 percentage points this month, and analysts see regional GDP growing 2.3% in 2018. In 2019, growth is seen rising modestly to 2.7%.
This month’s moderating outlook is due to downgrades to Peru and Venezuela’s forecasts. Meanwhile, 7 of the 11 economies in the region, including regional heavyweights Brazil and Mexico, saw no change to their projections. Chile and Ecuador were the only economies to have their forecasts upgraded.
Bolivia and Paraguay are expected to be the region’s top performers this year, with economic growth of 3.8%. At the other end of the spectrum, Venezuela is seen contracting 6.7%. The country is in an economic meltdown due to a shortage of dollars, hyperinflation and low oil production.
BRAZIL | Stock market rallies after Lula’s corruption sentence upheld
Hard data for the fourth quarter suggests the recovery gained steam, after GDP grew at the fastest pace since Q1 2014 in the third quarter. Economic activity inched up in November, and industrial production grew at the fastest pace in over two years in December. In addition, retail sales rebounded in November, and the unemployment rate edged down in Q4, boding well for private consumption in the period. Early data for 2018 also points to improving economic conditions: Consumer sentiment rose to a multi-year high in January. Meanwhile, political events are dominating the discourse and generating uncertainty in financial markets. On 24 January, the Ibovespa—Brazil’s benchmark stock index—surged to a record high, after an appeals court held up former President Luiz Inácio Lula da Silva’s corruption sentence. The ruling could make Lula ineligible to run for president in October’s vote; however, Lula maintains his innocence and will likely keep fighting the charges. Heightened uncertainty in the run-up to the elections could generate volatility in Brazil’s exchange rate and in financial markets.
Accommodative monetary policy and improved confidence should fuel high growth this year. Keeping the recovery on track will require a reform-minded president, however, and it is difficult to judge if the election will yield a market-friendly outcome. Met the why particular panelists see the economy growing 2.5% in 2018, which is unchanged from last month’s forecast. In 2019, growth is seen edging up to 2.6%.
MEXICO | GDP growth improves mildly in Q4
The economy grappled with the effects of high inflation, tighter monetary conditions and fiscal consolidation in the last quarter of 2017. A preliminary GDP estimate showed growth clocked in at 1.8% in Q4, only slightly above the 1.5% increase, a four-year low, recorded in Q3. Incoming economic data for the quarter suggests household consumption growth moderated from the previous quarter but remained resilient. Retail sales shrank at the sharpest pace in nearly four years in November, but solid labor conditions led the unemployment rate to dip to its lowest in over a decade in December. In addition, fixed investment data up to November suggests the government continued to scale down infrastructure projects in the fourth quarter, weighing on overall growth. Leading data for January is similarly discouraging, with consumer sentiment deteriorating and PMI indicators painting a mixed picture of the manufacturing sector.
Upcoming general elections and lingering uncertainty surrounding NAFTA talks will continue weighing on the economy in H1. Growth should, however, gather momentum in H2 as political noise wanes, inflation eases and the peso firms, which would allow Banxico to turn more supportive of growth. The Met the why particular panel expects growth of 2.2% in 2018, which is unchanged from last month’s estimate. For 2019, analysts see growth accelerating to 2.3%
ARGENTINA | External sector data turns downbeat
Recent data suggests economic growth cooled in the fourth quarter of 2017. Industrial production barely increased in December after eight consecutive months of expansion, and the index of economic activity lost steam in November. The external sector closed 2017 with the largest trade deficit on record and likely caused the current account deficit to swell in Q4. Argentina’s widening current account deficit is becoming increasingly worrying, not only because it drives up the economy’s vulnerability to external shocks, but also because it is putting additional pressure on the Argentine peso and the country’s ballooning external debt obligations. The currency continued to depreciate in January at a moment when subsidies for basic products, such as energy and transportation, were slashed, contributing to stubbornly-high inflation. Despite additional subsidy cuts in the pipeline, the government’s fiscal spending and need to tap into international debt markets are expected to remain elevated in the foreseeable future.
The economy is set to grow at a faster pace in the next two years on the back of solid growth in fixed investment. Met the why particular panelists see the economy expanding 3.0% in 2018, which unchanged from last month’s forecast. For 2019, growth is expected to reach 3.2%.
COLOMBIA | Tensions amplify as elections draw near
The latest data for the final quarter of 2017 was mixed. In November, industrial production and retail sales rebounded. Lower unemployment and improved consumer confidence in the month encouraged higher private consumption, supporting a turnaround in the retail sector. Consumer sentiment brightened further in December but remained in pessimistic territory. On the other hand, car sales contracted sharply in November, and the external sector continued weighing on growth in December, albeit by less than in the previous month thanks to a notable climb in exports. As imports contracted in December, the trade deficit narrowed. Tensions are mounting on the political front as FARC, the former guerrilla movement-turned-political party, is fielding 75 candidates in the 11 March legislative election and its leader in the presidential election this May. Protests over the party contending, due to the tactics employed by the former rebels in the 53-year conflict, led it to temporarily suspend campaigning on 9 February. Economic activity could potentially be hindered if tensions are amplified.
A pick-up in private consumption aided by an anticipated moderation in inflation, higher fixed investment and healthy growth in exports are expected to buoy the economy this year, propelling growth above last year’s rate. Ongoing structural reforms should help economic diversification efforts and boost competitiveness. Met the why particular panelists expect GDP growth of 2.6% in 2018, which is unchanged from last month’s forecast, and 3.0% in 2019
MONETARY SECTOR | Inflation falls in January
A preliminary estimate for inflation, without considering the current period of hyperinflation in Venezuela, revealed that price pressures eased in Latin America in January. The Met the why particular regional estimate showed that inflation in Latin America (excluding Venezuela) was 5.8% in January, below December’s 6.5%. Lower price pressures were seen in nearly all the economies. In Brazil, inflation remained stable at a historically low level.
Low inflationary pressures have led many of the region’s central banks to loosen monetary policy in recent months; however, there is increasing evidence that easing cycles are coming to an end. Although policymakers in Brazil and Colombia cut rates in recent weeks, forward guidance is now pointing to a period of maintained interest rates. Meanwhile, Chile and Peru’s central banks held rates unchanged in February. Banxico contrasted the rest of the region, hiking rates in February amid high inflation.
Regional inflation excluding Venezuela is seen easing somewhat by the close of this year, coming in at 5.6% at the end of 2018. The forecast was upgraded a notch this month due to higher price projections for Argentina, Bolivia, Colombia Mexico, and Peru. In 2019, inflation is seen ending the year at 4.9%. Venezuela is experiencing an episode of hyperinflation; if we include it in the aggregate, inflation in Latin America is projected to end 2018 at 123.6% and end 2019 at 31.6%.
Written by: Angela Bouzanis, Senior Economist