October 11, 2017
Regional recovery broad-based in Q2
Positive economic data continues to emerge from the Latin American economy, confirming that the recovery is gaining traction across the region. Detailed GDP data released by national statistical institutes confirms that the Latin American economy grew 1.1% annually in Q2, a notable acceleration from Q1’s 0.8% increase and the best result in over three years.
Recently released figures on Argentina’s economy revealed that GDP grew 2.7% annually in Q2—an over two-year high—as President Mauricio Macri’s turn to economic orthodoxy began to yield results. A broad-based acceleration was seen in the domestic economy, and investment growth was a particular bright spot, supported by the improved business climate and coming in at a four-year high. The positive economic momentum should bode well for the governing coalition in October’s midterm vote. In Ecuador, the recovery also gained speed as rapid credit growth led private consumption to record the best result in six years.
Elsewhere in the region, growth picked up nearly across the board, with the notable exceptions of Mexico and Uruguay. In Uruguay, a stark fall in fixed investment dampened the economy’s momentum. The poor result is partly explained by the ongoing closure of the La Teja refinery and reduced spending on electrical power generation.
Meanwhile, despite solid export volume to the U.S., a deterioration in construction-related activity and persistent weakness in mining and quarrying output weighed on the Mexican economy. The recent earthquakes that devastated the country in September do not bode well for a significant pick-up in H2. Economic disruptions are expected to have dented activity; however, overall the effects are likely to be temporary and growth could get a boost from reconstruction efforts going forward.
Incoming data for the third quarter suggests that growth in the region strengthened even further at the start of H2. A turnaround in the labor market and low inflation should provide a boost to Brazil’s economy, while the upturn in commodities prices in recent weeks bodes well for a number of the economies. FocusEconomics analysts see growth picking up to 1.8% annually in Q3.
Growth to pick up in 2018, but political risks are high
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After the Latin American economy contracted 0.7% in 2016, the region is set to return to growth this year. LatinFocus Consensus Forecast analysts see GDP increasing 1.5% in 2017. Lower inflation and a more favorable external environment are helping support a turnaround, although economic slack persists, especially in major player Brazil. Next year, growth is seen rising to 2.4%, unchanged from last month’s forecast, on the back of healthy external demand, higher commodities prices, and looser monetary conditions in some economies. However, political risks to the outlook are high. In 2018, there will be elections in Brazil, Colombia, Mexico and Paraguay, while Chile will go to the polls this November. Elevated political noise could hurt the economies’ financial assets or push economic legislation to the backburner.
This month’s unchanged 2018 outlook reflects stable growth prospects for 4 of the 11 economies surveyed for this report, including Peru. However, growth prospects improved for Argentina, Brazil, Chile, Ecuador, Mexico and Uruguay. Venezuela’s outlook was downgraded.
Peru is expected to be the region’s fastest growing economy next year, with projected 3.9% growth, followed closely by Bolivia and Paraguay. At the other end of the spectrum, Venezuela is seen contracting 3.2% and Ecuador is seen growing a slow 1.0%.
BRAZIL | Temer faces second vote to be tried for corruption
Incoming data points to a gradual improvement in the Brazilian economy following the rebound in GDP in Q2. The unemployment rate fell more than expected in the three months up to August, extending a streak of gains seen since March. Business and consumer confidence also improved slightly in September, while the manufacturing PMI pointed to expansion for a sixth consecutive month. Despite the improvement in economic data, political turbulence is casting a long shadow on the strength of the recovery. President Michel Temer is facing another criminal corruption charge, his second in two months. While it is widely expected that Temer has enough support in Congress to avoid a trial—two-thirds of the Lower House must vote in favor of a trial for the case to move to the Supreme Court—the accusations have further dented Temer’s already abysmal popularity and his reform agenda could lose steam as politicians’ distance themselves from him as the October 2018 general election draws near. Despite all the political noise, the government managed to make some progress on its reform agenda and auctioned off several oil blocks and hydroelectric dams in recent weeks.
FocusEconomics see the economy growing a measly 0.7% in 2017 as falling investment and austerity measures dampen growth. Next year, the recovery is seen gaining speed with GDP expanding 2.3%, up a notch from last month’s forecast. Low inflation and looser monetary policy should help revive the domestic economy, although uncertainty is high given the election year.
MEXICO | High inflation interferes with recovery in private consumption
The economy’s better-than-expected performance in H1 was due to resilient household consumption and renewed momentum in the manufacturing sector. However, leading data suggests some of the tailwinds that boosted growth in H1 faded in Q3. Although August’s trade report and PMI indicators for the July-to-September period still paint a bright picture of the manufacturing sector, data for consumption suggests the long-touted moderation in private spending may have finally arrived. Retail sales barely expanded for a second consecutive month in July, while auto sales continued to contract through August, reaffirming the narrative that multi-year high inflation is denting households’ real income growth despite a tight labor market and robust remittance inflows. Q3 growth will also reflect the economic impact of the two earthquakesthat devastated Mexico in September, although reconstruction efforts are expected to shore up economic activity in the quarters to come.
The economic outlook remains clouded by uncertainty linked to the renegotiation of NAFTA and the elections scheduled in Mexico for next July. While resilient in H1, GDP growth should moderate in H2 due to the immediate effects of the earthquake on economic activity and slower private consumption growth. Our panel expects growth of 2.2% in 2017. Next year, the economy is expected to benefit from stronger government consumption ahead of the election and softer inflation. Panelists see GDP growth at 2.3% in 2018, which is up 0.1 percentage points from last month’s forecast.
ARGENTINA | Budget targets narrowing fiscal deficit
Solid growth in fixed investment and private consumption propelled economic growth in Q2 to a 2.7% expansion, the fastest rate in almost two years. The quarterly print taken together with more recent data suggest that the recovery is gaining traction. In July, economic activity expanded at the fastest in over two years and industrial production logged its fourth consecutive increase in August. Noting these economic tailwinds, the government presented the 2018 budget to Congress. The bill envisages GDP growth of 3.0% this year and 3.5% next year along with a significant narrowing of the fiscal deficit. Although 2017’s growth figure was revised down from the previous estimate, the latest polls put the government ahead in the runoff legislative elections of 22 October. Growing confidence in Macri’s economic policies is becoming more apparent as recent data, such as a decline in unemployment in Q2 and falling poverty in the first two quarters, suggests that growth is finally permeating across all social strata.
Buoyed by business-friendly reforms adopted by the Macri administration, the economy is expected to rebound this year and next. Fixed investment should recover due to an improved business environment and higher public infrastructure spending, while household spending should benefit from declining inflation and rising wages. FocusEconomics panelists foresee the economy expanding 2.7% this year, and 3.0% in 2018, which is up 0.1 percentage points from last month’s forecast.
COLOMBIA | Pre-election spending to lift growth
The economy is finally experiencing relief thanks to higher commodities prices and a slow but steady recovery in the external sector, which is benefitting from a weaker peso and improved export competitiveness. Moreover, data for Q3 points to an acceleration in economic growth. Domestic demand should be firmer in Q3 as lower inflation and interest rates boost consumer spending, as evidenced by the pick-up in retail sales in July. Furthermore, the government is gearing up for the parliamentary elections in March 2018 and the first round of the presidential election in May 2018, meaning pre-election spending is on the rise. In addition, investment spending of USD 10.4 billion in 2017 for the 4G road infrastructure program is boosting economic growth. However, widespread corruption involving top government officials, including a former supreme court judge who was arrested on 20 September, continues to undermine stability and is evolving into one of the largest challenges the country is facing moving forward.
The transition of the FARC from a militant group into an official political party and the first-ever cease fire with ELN rebels are significant strides towards peace, which will eventually translate into new economic opportunities for regions previously affected and will also improve security conditions and attract foreign investment. Our panelists expect GDP to grow 1.8% in 2017 and 2.7% in 2018, which is unchanged from last month’s forecast.
MONETARY SECTOR | Inflation rests at multi-year low in September
A preliminary estimate suggests that inflationary pressures in Latin America—without considering the current period of near hyperinflation in Venezuela—were stable in September. The FocusEconomics regional estimate showed that inflation in Latin America (excluding Venezuela) was 5.4%, matching August’s result and marking the lowest reading since February 2013. The print largely reflected low price pressures in Brazil, where inflation rested at the lowest level in the country’s modern history thanks to a strong real and subdued demand pressures.
Lower price pressures have allowed most central banks in the region to ease their monetary policy rates this year to support economic recoveries. In September, Peru’s Central Bank reduced its policy rate, while Colombia’s Central Bank paused its easing cycle after seven consecutive cuts. However, elevated inflation in Mexico has prevented policymakers from loosening the reins and Banxico held rates unchanged in September. Chile’s Central Bank also made no changes to its monetary policy.
Venezuela is experiencing an episode of near hyperinflation; if we include it in the aggregate, inflation in Latin America is projected to end this year at 39.1%. Excluding Venezuela, inflation in Latin America is expected to be 6.1% this year. Going forward, analysts project regional inflation excluding Venezuela to fall to 5.2% in 2018 (47.7% including Venezuela), which is unchanged from last month’s forecast.