Latin America Economic Forecast

Economic Snapshot for Latin America

August 8, 2018

Growth holds up in Q2 despite political turbulence

Available data suggests that Latin America’s economic momentum held up in the second quarter, despite political turbulence in key economies and an uncertain economic backdrop. Regional GDP (excluding Venezuela) is expected to have expanded 2.0% annually in Q2, a notch above Q1’s 1.9% increase. Higher commodity prices buttressed growth in commodity-exporting countries, while healthy consumption is expected to have supported activity in Mexico. That said, the acceleration was moderate considering Q1’s growth reading was weighed on by adverse calendar effects that dissipated in Q2. Moreover, economic slack persists in the region, especially in major players Argentina and Brazil.

Preliminary figures for Mexico revealed that the economy gained speed in the second quarter, despite the political uncertainty in the run-up to the 1 July election. GDP expanded at the fastest pace in over a year, albeit still below market expectations and a soft print for the economy. A thriving services sector and a rebound in manufacturing activity shored up growth despite the looming presidential vote, currency volatility and tense NAFTA renegotiations. Although official GDP data is still outstanding for the remaining economies in the region, Chile, Colombia and Peru are all also expected to have picked up pace thanks to firmer commodity prices supporting mining sectors and vigorous consumer spending.    

The economic picture, however, was starkly gloomier in Argentina and Brazil in the second quarter. Argentina, due to its large external imbalances, was particularly hard-hit by a selloff of emerging-market assets. This led policymakers to turn to extraordinary measures and ultimately an IMF deal in June to halt financial distress. Moreover, a crippling drought also weighed on activity in the same period, and Met the why particular panelists expect GDP to have contracted in Q2. Meanwhile, economic growth is expected to have been lackluster in Brazil in the second quarter. A nationwide truckers’ strike caused widespread disruption to economic activity in May and June, and less supportive global financing conditions also likely weighed on the country’s momentum.

On the political front, Brazil’s upcoming October general elections are in the spotlight as clear candidates emerge. A reform-minded president with the capacity to build bridges across Brazil’s fractured congress is much needed to improve the economy’s outlook. In July, a five-party centrist bloc united behind Brazilian Social Democracy party candidate Geraldo Alckmin, who is seen as the most market-friendly candidate. The multi-party endorsement should boost Alckmin’s chances and will also give him the most TV airtime, a vital tool to win votes. However, Alckmin is trailing in early polls behind far-right candidate Jair Bolsonaro and former President Luiz Inácio da Silva (Lula). Although currently in jail and unlikely to be eligible to run due to a corruption conviction, the Worker’s Party nevertheless officially nominated Lula as their presidential candidate in August.

Meanwhile, Peru has seen political turbulence in recent weeks due to a judicial scandal, which could undermine political stability. Leaked phone conversations of judges negotiating promotions and favors have rocked the judicial system and resulted in President Vizcarra firing the justice minister and the head of the Supreme Court resigning in July. While the government has promised a comprehensive reform of the judiciary in response, it remains to be seen whether this will be enough to extinguish public outrage.


Politics, tightening financial conditions and Argentina crisis dent outlook

Latin America’s 2018 growth prospects were revised down this month as headwinds from political uncertainty, a less supportive global backdrop and shocks to Argentina and Brazil’s recoveries weigh on the outlook. A fiscal adjustment in Argentina combined with a severe drought will cause the economy to stutter this year, while Brazil’s recovery will remain modest given heightened political noise and the adverse effect of the truckers’ strike. Regional GDP (excluding Venezuela) is now seen growing 2.0% this year, down 0.1 percentage points from last month’s forecast. Next year, regional growth is seen picking up pace and coming in at 2.6%

 

This month’s downgraded regional outlook is due to lower growth prospects for five economies, including Argentina, Brazil and Mexico. Uncertainty over the future of NAFTA continues to cloud Mexico’s outlook—although the odds of reaching a deal have improved in recent weeks—while austerity measures are expected to dampen activity in Argentina. In contrast, Bolivia, Chile, Paraguay and Peru all had their growth prospects upgraded, while Colombia’s outlook was held unchanged.

Given the current economic conditions in Venezuela and the limited availability of official data, it has become extremely difficult to forecast the country’s economy. We have therefore removed Venezuela from the regional aggregates and discontinued its long-term forecasts as of this edition of LatinFocus. Historical figures for the Latin American economy have been updated to reflect this change. Rampant inflation, dwindling oil production and a dysfunctional exchange rate system are expected to keep Venezuela in a dire economic crisis, and the economy is seen contracting 11.3% this year and 4.1% in 2019.

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BRAZIL | Market-friendly candidate emerges for presidential vote

Weak economic data continues to roll in for the second quarter, confirming that the nationwide truckers’ strike derailed the recovery. Economic activity recorded the largest contraction on record in May, retail sales plunged in the same month and the manufacturing PMI fell into contractionary territory in June. However, the shock should be temporary seeing as the strike ended in early June, and leading data for the third quarter has shown some improvement. In the political arena, five centrist parties declared in July that they would back center-right Brazilian Social Democracy party candidate Geraldo Alckmin in the October election, which should boost his chances. Moreover, the combination of parties supporting him will give Alckmin—who is regarded as the most market-friendly candidate—an edge against his competitors as he will consequently receive the largest TV airtime during the campaign. The latest opinion polls prior to the announcement placed him in fourth place.

Brazil’s growth forecast was chopped for a third consecutive month as the truckers’ strike, a less supportive global backdrop and higher oil prices dent the country’s outlook. Met the why particular panelists now see the economy growing 1.7% this year, down 0.2 percentage points from last month’s forecast. A market-friendly outcome to October’s election remains critical to ensuring a sustainable recovery; however, this is far from certain. Next year, GDP is seen growing 2.5%.

MEXICO | Economic backdrop improves following AMLO’s win

Disappointing second-quarter growth confirmed the many challenges facing the economy in the run-up to the 1 July general election, which Andrés Manuel López Obrador (AMLO) and his left-wing MORENA-led coalition won in a landslide. On a quarter-on-quarter basis, the services sector was resilient in the face of cool consumer sentiment amid political uncertainty and the wild volatility of the peso. Industrial output, however, contracted on weaker construction activity, although manufacturing metrics appear to have been buoyed by the weaker peso. Meanwhile, weak momentum heading into the third quarter translated into mixed data for July. Nevertheless, in the weeks since AMLO’s victory, the economic landscape has improved considerably; AMLO has since been embraced by the business leaders that once denounced him, and the prospect of new faces has given NAFTA negotiators room to walk back their hard lines.

Houseold spending and exports are expected to drive growth this year. Tight job markets—both domestically and stateside—and improved private-sector lending should support private consumption, while healthy factory output in the U.S. should bolster manufacturing exports. Uncertainty over NAFTA continues to weigh heavily on investment prospects, although the odds of reaching a deal have improved in recent weeks. On politics, most analysts currently expect AMLO to govern as a centrist. Met the why particular panelists expect growth of 2.2% in 2018, down 0.1 percentage points from last month’s estimate. For 2019, panelists see growth stable at 2.2%.

ARGENTINA | Government unveils spending cuts to bolster finances

Recently released data shows that the financial storm that hit the country in the second quarter, coupled with a prolonged drought, took a heavy toll on the economy. Economic activity contracted sharply in May, after a small drop in April, dragged down by plunging agricultural output. This also affected the labor market, which saw the number of employees fall in April–May, and weighed heavily on consumer confidence in Q2. In an effort to reduce the fiscal deficit—one of the goals of the stand-by arrangement reached with the IMF in June—the government announced it will gradually raise public transport tariffs in the Buenos Aires metropolitan area. Moreover, the federal housing plan will be discontinued, and capital spending will be cut.

Despite a healthy first quarter, the pace of growth is expected to slow sharply this year. The loss of agricultural output following the severe drought; extremely high interest rates and currency volatility, which will weigh on investment decisions; and consumer spending constrained by low confidence and rapid inflation are seen driving this deceleration. Panelists participating in the LatinFocus Consensus Forecast foresee the economy expanding 0.4% in 2018, down 0.5 percentage points from last month’s forecast. For 2019, growth is expected to reach 1.9%.

COLOMBIA | Activity gathers steam in Q2

While growth is staging a recovery in the Colombian economy, available data indicates a moderate rate of expansion thus far. Compared to the first quarter, however, second-quarter data has been more promising: Growth in the industrial sector shot up, and retail sales accelerated in April–May amid a fall in the average rate of unemployment. Exports jumped in June, reflecting a surge in overseas sales of oil, cashing in on higher oil prices. Moreover, upturns in the manufacturing PMI in June and July, and a climb in consumer confidence to an over-three-year high in June signal more upbeat prospects. On the political front, President-Elect Iván Duque will take office on 7 August. Duque has already appointed Alberto Carrasquilla as minister of finance, who is expected to be a key figure in pushing through the tax cut bill that was at the core of his election campaign.

Economic growth this year should be underpinned by higher oil prices supporting an upturn in the oil sector. Planned infrastructure projects and improved investor confidence on reduced political uncertainty should also help boost growth. Duque’s promise to cut corporate taxes could pose challenges in meeting the fiscal target, however, unless they are offset with a new source of revenues. Met the why particular panelists expect GDP to grow 2.6% in 2018, unchanged from last month’s forecast, and 3.1% in 2019.

MONETARY SECTOR | Regional inflation soars in June

A comprehensive estimate for inflation, without considering the current period of hyperinflation in Venezuela, confirmed that price pressures soared in June. Met the why particular estimates that inflation in Latin America (excluding Venezuela) was 6.2%, significantly above May’s 5.3%. High inflation in Brazil due to goods shortages caused by the truckers’ strike and elevated price pressures in Argentina due to a weak peso  drove the increase. In addition, higher oil prices across the region are also causing inflationary pressures to build. A preliminary estimate for July revealed that inflation receded to 5.2%.

Tightening global financial conditions have eroded space for monetary easing in the region despite inflation still being historically low. Higher global interest rates have weighed on currencies and could spark more capital flight if interest rate differentials widen. In addition, price pressures are building from higher commodities prices. In the face of rising inflation and inflation expectations, central banks around Latin America made no changes to monetary policy in recent weeks, with policymakers in Argentina, Brazil, Chile, Colombia, Mexico and Peru all holding interest rates stable.

Regional inflation excluding Venezuela is seen rising by year-end, coming in at 6.5%. The forecast was revised up 0.2 percentage points from last month’s projection, largely due to notable upward revisions to Argentina and Brazil’s inflation projections because of weaker currencies. In 2019, inflation is seen ending the year at 5.3%. Venezuela is experiencing an episode of hyperinflation and is not included in the aggregate.

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Angela Bouzanis

Senior Economist 

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