Latin America: Election cycle casts long shadow on region's growth prospects Economy starts year on a brighter-than-expected note as Argentina turns a corner
August 9, 2017
The Latin America economy has benefited from strengthening economic recoveries and, according to preliminary data, the region expanded 1.1% annually in Q2. The print was above the 0.8% increase in Q1, which had represented the first expansion after nearly two years of declining or stagnant activity. If confirmed, Q2’s figure would have marked the strongest growth in over three years.
With Q2 data still outstanding for most countries in the region, available data for Mexico showed that GDP decelerated. While the result was broadly in line with the expectations, high inflation is gradually eroding Mexican consumers’ purchasing power. Elsewhere in the region, Brazil’s economic dynamics are expected to have improved in Q2 due to a more favorable external environment and lower inflationary pressures. Argentina’s growth likely picked up in Q2 as the scope of the economic recovery is broadening beyond the agricultural and construction sectors. More accommodative financial conditions and declining inflation have likely prompted GDP to accelerate in Colombia. In Chile, the economy is slowly recovering from Q1’s lackluster result, which was negatively affected in February and March by the country’s longest mining strike since the early ‘70s. Similarly, Peru’s economy is gathering pace following massive floods in Q1 and a halt in investment as a result of the Odebrecht scandal.
While the economic recovery is gradually gaining traction in Latin America, the upcoming election cycle in the region is expected to increase political noise and fuel uncertainty about the economic course of some economies. The region’s powerhouses Brazil and Mexico will hold presidential elections in the second half of 2018. The vote in Brazil could help to close a chapter of corruption scandals that swamped the country in the last few years. While former President Luiz Inácio Lula da Silva is comfortably leading the polls, his chances depend on a looming court ruling that could send him to jail. In Mexico, the approval ratings of President Enrique Peña Nieto, who is not eligible for a second term, and his Institutional Revolutionary Party (PRI) are at record lows due to feeble economic growth and the inability of the current administration to tackle structural weaknesses. In Argentina, legislative elections to be held in October this year will be a crucial test to assess the popularity of the Macri’s administration and his reform agenda. In Chile, former President Sebastián Piñera will lead a center-right coalition with the aim of ousting the center-left alliance from the presidency in the November election. Paraguay and Venezuela will hold presidential elections next year, while Colombia will renew its parliament. Latin America’s crowded election agenda will certainly reshape the political landscape in the region and it is yet to be seen if new leadership will help the region escape from the current patchy economic dynamics.
Outlook stable on balanced risks to growth
The regional growth estimate for 2017 was left unchanged this month as risks to the outlook are broadly balanced. While political uncertainty is denting Latin America’s economic prospects, strong global economic dynamics and signs that key commodity prices will increase in the coming months promise to stimulate overall growth in the region. Moreover, most of U.S. President Donald Trump’s controversial campaign pledges that could have had a negative impact in the region have thus far failed to materialize. That said, NAFTA renegotiations set to begin on 16 August have the potential to weigh on growth prospects, particularly in Mexico. LatinFocus Consensus Forecast analysts expect that the region will expand 1.4% in 2017. Next year, the region’s economy is seen gaining pace and rising 2.3%, mainly on the back of broader economic recoveries in Brazil, Chile, Colombia and Peru.
This month’s unchanged outlook reflects stable growth prospects for 6 of the 11 economies surveyed for this report, including the region’s heavyweights Argentina, Brazil and Mexico. Growth prospects deteriorated in Colombia, Peru and Venezuela, while Paraguay and Uruguay were the sole countries that experienced an upgrade to their economic outlooks.
BRAZIL | Politics continue to jeopardize economic recovery
President Michel Temer survived the vote on 2 August in Congress and avoided the possibility of being tried for corruption. An interruption of the government‘s reform agenda was thus sidestepped for now, although political noise is still high. The government is trying to pass a critical pension reform by October and a tax overhaul by the end of the year, two badly needed measures to correct imbalances in the hobbled economy. However, Temer is not off the hook yet and is facing abysmal approval ratings along with the likelihood that the public prosecutor’s office will file more corruption-related cases against him in the coming months. Meanwhile, economic data has been mixed in recent months, suggesting that the recovery remains shaky. Industrial production growth stuttered in June and the manufacturing PMI fell in July, although a recent increase in commodities prices bodes well for exports.
After two consecutive downgrades to Brazil’s outlook, our panelists held their forecasts unchanged this month. The shaky political scene is dampening confidence in the economy, however an aggressive loosening of monetary conditions and low inflation will provide support to activity. The Met the why particular panel sees GDP expanding a meagre 0.4% in 2017. The recovery is seen gaining speed in 2018 and GDP should increase 2.0%.
MEXICO | Growth slows ahead of NAFTA renegotiation
The economy expanded at a markedly slower pace in Q2, although positive momentum was largely retained and growth prospects remain relatively upbeat. While private consumption has shown signs of cooling off heading into Q3—auto sales were down in both June and July—upbeat manufacturing output and sentiment, a strong labor market and soaring remittance inflows continue to support economic activity. Along with positive economic momentum, the government’s successful efforts to control the fiscal deficit and debt levels led both S&P Global Ratings and Fitch Ratings to upgrade the outlook of Mexico’s sovereign credit rating to stable while maintaining the country’s BBB+ grade. These upgrades come only weeks before talks to renegotiate NAFTA officially start on 16 August. Mexico recently disclosed its goals for a new agreement, prioritizing free access for goods and services and greater labor market integration.
Although the economy has dispelled fears of an abrupt slowdown in H1, growth will continue decelerating towards year-end as households feel the pinch of high inflation and fixed investment remains subdued due to plummeting public capital expenditure. The weeks ahead will be crucial to define the near- and long-term outlook of the Mexican economy, with the risk of a disorderly renegotiation of NAFTA still weighing on panelists’ forecasts. Our panel expects GDP to grow 2.0% this year, which is unchanged from last month’s forecast, and 2.2% in 2018.
ARGENTINA | Economic recovery is slowly gaining traction
Hard data for Q2 suggests that the recovery is finally gathering pace. Economic activity recorded its best performance in a year and a half in May, and in June industrial production jumped on the back of a broad-based expansion, with the food, automotive and metallurgic sectors leading the way. Adding to the good news, the country posted a primary fiscal deficit of 1.5% of GDP in the first half of 2017, significantly smaller than the government target of 2.0%. On the downside, exports fell in June, dragged down mainly by declining demand from China, India and Venezuela, and in July consumer sentiment remained downbeat, largely due to perceived uncertain short-term economic prospects for the country. In the second half of July, the peso saw some weakness against the U.S. dollar. Investors hedged portfolios with dollar-denominated assets as they grew more concerned about the possible outcome of this October’s parliamentary elections, following surveys suggesting that former-President Cristina Kirchner could secure a Senate seat. This prompted the Central Bank to intervene in the FX market by selling dollars, which put an end to the slide.
Thanks to the reforms adopted by the Macri administration, the economy will rebound this year. Fixed investment will recover owing 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 2.7% in 2018.
COLOMBIA | Economy struggles to gather pace in Q2
Leading indicators suggest that the economy accelerated only marginally in Q2, a disappointing possibility following tepid growth in Q1. In May, industrial production contracted for a second consecutive month as the textile industry suffered from competition from cheaper products coming from Asia. However, other indicators paint a more optimistic picture: consumer confidence edged up and unemployment fell in June, both of which bode well for a much-needed boost to household spending. On the external side, exports recorded an almost flat reading in June after a stellar expansion in May, hinting that the prolonged slump in commodity prices could weigh on export values into Q3. Finally, H2 was ushered in by good news: coffee production soared by 25% in July as harvests impressed to the upside and external demand jumped.
A rebound in investment, driven by lower interest rates and the recovery in commodities prices, and higher government spending are expected to support economic growth this year. Moreover, improving credit conditions and the government’s redoubled commitment to fiscal responsibility present moderate upside risks for the outlook. Our panelists expect GDP to grow 1.9% this year, which is down 0.1 percentage points from last month’s forecast, and 2.8% next year.
MONETARY SECTOR | Latam ex-Venezuela inflation stabilizes in July
Inflationary pressures in Latin America—without considering the current period of near hyperinflation in Venezuela—appear to have stabilized in July. The Met the why particular preliminary regional estimate showed that Latin America’s inflation (ex-Venezuela) was stable at last month’s 5.5% in July.
Some central banks in the region are taking advantage of benign inflationary pressures this year, and Brazil, Colombia and Peru decided to cut their benchmark rates in July in an attempt to support the countries’ economic recoveries. Although the Central Bank of Chile stayed put at its 13 July meeting, the policy rate is at the lowest level since 2011. With the main exceptions of Argentina and Mexico, the rest of the region’s key central banks are expected to have lowered their key policy rates by the end of this year.
Venezuela is experiencing an episode of near hyperinflation and, if we include it in the aggregate, inflation in Latin America is projected to end this year at 34.0%. Excluding Venezuela, Latin America’s inflation is expected to fall to 6.4% this year. Going forward, analysts project regional inflation excluding Venezuela to fall further to 5.3% in 2018 (30.8% including Venezuela).
Written by: Angela Bouzanis, Senior Economist