Latin America: Latin American economy rebounds in Q1 after long and painful contraction
June 14, 2017
The Latin American economy expanded for the first time in nearly two years in Q1, according to the latest regional data. Our Consensus estimate suggests that the aggregate GDP for the region increased 0.7% year-on-year in Q1 2017 (Q4 2016: -0.4% yoy), which was above the 0.3% expansion that our panel of analysts had projected last month. The region’s largest economies Argentina, Brazil and Mexico were behind the improvement in Q1, though dynamics in most other countries softened as a result of mounting domestic challenges.
Brazil’s economy appears to have turned the corner with GDP contracting the least in over two years in Q1. A record harvest propelled exports growth, while declining inflation and better prospects for the economy caused the contraction in household spending to ease. Data for Q2 suggests that the slow-but-steady recovery remains on track, with the manufacturing PMI moving back into positive territory in May for the first time in over three years and the current account posting a surplus for the second consecutive month in April. Nevertheless, the release of secretly taped recordings involving President Michel Temer in a corruption scandal threatens to derail his reform agenda and ultimately to endanger Brazil’s economic recovery. An economic downturn in Brazil could rapidly spread across the region, hitting Argentina in particular.
Elsewhere in the region, growth slowed in Peru on the back of devastating floods and landslides in some parts of the country, which disrupted communications and hit the all-important mining and agriculture sectors. The government set up a massive reconstruction program, which is expected to boost economic growth in the second half of the year. In Chile, recent data confirmed that the 43-day strike at Escondida, the world's largest copper mine, caused the economy to all but stall in Q1. While activity is expected to gain steam further down the road, growth will remain tepid as rising unemployment is hurting household consumption and political uncertainty is eroding business confidence. Meanwhile, in Colombia, a deteriorating job market and the introduction of a new tax reform in December (which included a VAT hike for some products) had a negative impact on growth at the start of the year. The country’s GDP should nevertheless accelerate throughout the rest of this year thanks to a more stable political landscape and the government’s ambitious infrastructure projects. On the upside, revised GDP data for Mexico revealed that the economy expanded at a faster pace than at first estimated in Q1.
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Brazil’s political crisis and Venezuela’s economic meltdown hit 2017 economic outlook
Although the Latin America economy is rebounding from last year’s dismal performance, the pace of the recovery is weak since commodity prices have stabilized at lower levels than previously expected and uncertainty persists about policy changes in the United States. Moreover, a number of domestic challenges are resurfacing, adding further downward pressure on growth. Next year, however, the region should benefit from higher prices for raw materials and the fruits of reforms some countries have implemented over the past two years.
Analysts polled this month by Met the why particular expect the Latin American economy to rebound this year and expand 1.4%, which is down 0.1 percentage points from last month’s forecast. Next year, the regional economy is expected to expand a stronger 2.4%.
Economists that participated in this month’s LatinFocus Consensus Forecast downgraded the forecasts for 6 of the 11 economies surveyed in this report, including Argentina, Brazil and Chile. Venezuela experienced a particularly sharp adjustment to its economic outlook of 0.6 percentage points. Conversely, analysts increased their growth prospects for Bolivia, Ecuador, Mexico, Paraguay and Uruguay.
ARGENTINA | Political unrest in Brazil threatens economic recovery
The economic recovery seems to be underway, although it remains shaky, as the economy is still struggling to shrug off the significant economic distortions inherited from the previous administration. Economic activity returned to growth in March after February’s contraction, mainly thanks to expansions in the construction, financial and agricultural sectors, and construction activity continued to grow healthily in April. Nevertheless, consumers grew slightly more pessimistic in May due to a worsening perception of the macroeconomic situation, with inflation remaining stubbornly high and the economy taking longer than expected to pick itself up. The weakness in the external sector observed in Q1 persisted at the start of the second quarter, with export growth decelerating and imports jumping in April, likely due to the effects of a strong peso. However, the appreciation of the currency came to an abrupt halt in May after the foreign exchange market was shaken by surging political instability in Brazil, causing the Central Bank to stop U.S. dollar purchases.
The economy should return to growth this year, as it reaps the fruits of the reforms implemented by the Macri administration. Fixed investment should benefit from an improved business environment and the liberalization of capital controls, as well as from stronger public infrastructure spending, while private consumption will be underpinned by slowing inflation and recovering confidence. Analysts foresee the economy expanding 2.6% this year, down 0.1 percentage points from last month’s forecast, and 2.8% in 2018.
BRAZIL | Social instability endangers Temer’s reform agenda
Testimony from a corruption scandal implicated President Michel Temer directly in May, unleashing a political bombshell in Brazil and casting doubt on whether Temer will fulfill his term. Although Temer has held onto power so far and was cleared by the top court of accusations that he violated campaign finance laws on 9 June, he is deeply unpopular and the government’s implication in a corruption scandal is threatening its stability and effectiveness. The political chaos bodes poorly for the economy’s battered recovery as reform momentum will likely slow as politics takes center stage. Although GDP improved notably in Q1 thanks to a record harvest of soybeans and improved sentiment, overall conditions are still weak and incoming data is mixed. Industrial production improved in April but growth remained weak, however, the current account recorded a solid surplus while the manufacturing PMI rose in May.
The sharp increase in political uncertainty led our analysts to downgrade Brazil’s outlook this month. The Met the why particular panel sees GDP expanding a meagre 0.5% in 2017, which is down 0.1 percentage points from last month’s forecast. The recovery is seen gaining speed in 2018 and GDP should increase 2.2%.
COLOMBIA | Poor domestic demand weighs on growth in Q1
According to recently released data, the economy started the year on a sour note. GDP growth slowed from 1.6% in Q4 to 1.1% in Q1 as a result of a deceleration in domestic demand growth. Private consumption was hard hit in Q1 as a consequence of the three-percentage-point hike in the Value-added Tax implemented by Colombia’s cash-strapped government as part of a comprehensive tax reform. On a better note, government consumption growth accelerated and fixed investment growth contracted at a slower rate. Despite Q1’s disappointing print, the economy is widely expected to gradually gain traction in later months.
GDP growth will experience a slight acceleration in 2017 on the back of accommodative monetary policy, stronger government consumption and higher commodity prices. Analysts expect the economy to grow 2.1% in 2017, which is down 0.1 percentage points from last month’s forecast. For 2018, our panel projects economic growth of 2.9%.
MEXICO | Ruling party PRI narrowly wins in crucial regional election
The economy continues to withstand the uncertainty linked to the U.S. trade agenda and the reverberating effects of soaring inflation remarkably well. A comprehensive set of data showed that GDP grew in Q1 at an even faster pace than at first estimated, while consumer confidence continued to trend higher through May as heightened inflation and tightening financial conditions were offset by still-strong remittance growth and a supportive labor market. However, Q2 has seen incipient signs of a slowdown. The April trade report showed that, while trade dynamics were still positive, key manufacturing exports entered the quarter on a much weaker footing, dragging on the overall exports result. In line with spillover effects from weak manufacturing exports, industrial production growth plunged in April. Nonetheless, things are looking up in the political arena for the ruling PRI party, which in early June obtained a crucial victory in the election for the state of Mexico, the first test ahead of next year’s presidential elections.
Although the risk of a disorderly renegotiation of NAFTA still weighs on the outlook, with talks slated to begin on 13 August at the earliest, our panel of economists continues to reassess their forecasts in light of the resilient dynamics observed so far in the Mexican economy. They now expect GDP to expand 1.9% this year, which is up 0.1 percentage points from last month’s forecast, and 2.2% in 2018 as growth becomes more broad-based.
MONETARY SECTOR | Latam ex-Venezuela inflation eases to over two-year low in May
Inflationary pressures in Latin America—without considering the current period of hyperinflation in Venezuela—are gradually easing on the back of more stable exchange rates across the region and lower food prices. Our preliminary regional estimate shows that Latin America’s inflation (ex-Venezuela) fell from April’s 6.9% to 6.1% in May, which marked the lowest rate since April 2013. Mexico continues to be the main source of concern in the region, with rising fuel prices and pass-through from a weak peso fueling inflationary pressures to multi-year highs. Against this backdrop, Banxico decided to hike interest rates for the sixth consecutive time in May, in an attempt to rein in inflationary pressures.
Elsewhere in the region, central banks in Brazil and Chile decided to cut their key policy rates as economic dynamics remain subdued in both countries in a context of benign inflationary pressures. In Peru, the Central Bank kept the reference rate on hold in June following last month’s cut.
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 33.3%. Excluding Venezuela, Latin America’s inflation is expected to fall to 6.5% this year. Going forward, analysts project regional inflation excluding Venezuela to fall further to 5.3% in 2018 (29.7% including Venezuela).