The Latin American growth outlook for 2013 deteriorated again this month, continuing the downward trend observed since May last year. LatinFocus panellists cut their forecast by 0.2 percentage points to 3.2%. As in the previous month, the reading primarily reflects downward revisions to Brazil and Mexico, which account for more than 60% of the regional output. Prospects for Chile, Ecuador, Peru and Venezuela were also revised down, whereas those of Argentina, Bolivia, Colombia and Uruguay were left unchanged. Only the forecast for Paraguay was revised up (0.6 percentage points) to a 10.9% rise, boosted by a favourable base effect owing to the 1.2% drop suffered last year. In addition, regional prospects for 2014 were revised a notch down, with the panel now forecasting growth to pick up to 3.7%.
Weaker global background weighs on Latin American outlook
The deteriorating outlook for the region comes against a backdrop of weaker global growth. In particular, forecasts for the United States, the Eurozone and China – which account for roughly half of the world economy – were revised down over the previous month. In the United States, uncertainty surrounding the effects of the fiscal adjustment prompted economists to lower their projections despite promising signs from both the labour market and the housing sector. Meanwhile, the Eurozone remains mired in the longest recession in its history, while the Chinese economy slowed again in Q1. Only Japan is helping to mitigate the negative developments seen in Europe and America, with growth in Q1 rebounding vigorously (+4.1% saar), boosted by massive fiscal and monetary stimulus under Prime Minister Shinzo Abe’s “three arrows” strategy (see “Abenomics: the risk of having too much success” – 29 May 2013).
Federal Reserve in the spotlight after hinting asset purchase reduction
Speculation of the possible timing and pace of Federal Reserve’s exit strategy from its quantitative easing (QE) programme has taken the headlines recently. The strengthening of the U.S. labour market along with the release of the Fed’s latest minutes – where “a number of participants expressed willingness to adjust the flow of purchases downward as early as the June meeting” – suggests that tapering of QE may take place sooner than expected. While the Fed has so far commented only on the possibility of reducing the pace of its asset purchases, which would not represent a monetary tightening, such an event would mark the first step towards ending QE in the medium term. As a result, the next Federal Reserve policy meetings will be followed with a lot of attention.
Regional governments and central banks take action to mitigate currency depreciation
Against this backdrop, volatility in financial markets has increased markedly all around the world, with stock prices falling and bond yields rising in May. In addition, the U.S. dollar appreciated against most currencies, in particular emerging market currencies, as a shift in the current ultra-loose monetary policy could end the large capital flows that have been flooding developing economies in recent years. As a result, several Latin American governments and central banks have started to take action in order to mitigate the recent depreciation suffered by their currencies. In Brazil, the Central Bank sold a total of USD 2.3 billion in currency swaps, while the government scrapped the financial operations tax on foreign purchases of fixed income instruments and the financial transactions tax on currency derivatives. Colombian monetary authorities announced the reduction of their program of dollar purchases from at least USD 3.0 billion in the January-May period to at least USD 2.5 billion in the May-September period. Meanwhile, the Argentinean peso recovered some of the lost ground in the black market as a result of the three-pronged approach adopted by the Kirchner administration, which included the sale of USD denominated bonds, requesting traders to exchange the peso at a lower rate and a controversial tax amnesty for holders of undeclared dollars.
Growth accelerates in Brazil but still disappoints analysts’ expectations
In line with LatinFocus panellists expectations, economic activity moderated in the first quarter across most of the region. In fact, GDP growth accelerated only in Brazil (Q4 2012: +1.4% year-on-year; Q1: +1.9% yoy) which, nevertheless, fell short of market expectations. LatinFocus Consensus Forecast panellists expect the Brazilian economy to grow 2.8% this year, which is down 0.3 percentage points from last month’s forecast. For next year, the panel sees economic growth accelerating to 3.4%. On the monetary policy front, the Brazilian Central Bank continued to tighten the reins, raising the benchmark SELIC interest rate by 50 basis points to 8.00%. In contrast, monetary authorities in Chile, Colombia, Mexico and Peru left interest rates unchanged. Moreover, while there was no monetary policy meeting in Uruguay, officials announced plans to switch their focus to monetary aggregates rather than a single monetary policy rate.
Surging prices in Venezuela push regional inflation higher Regional inflation rose from a revised 6.6% in April to 6.9% in May. The stronger regional print mainly reflects higher inflation in Venezuela, which jumped from 27.9% in April to 33.7%. LatinFocus Consensus Forecast panellists expect regional inflation to close the year at 6.9%, which is up 0.3 percentage points from last month’s projection. For 2014, panellists forecast inflation to end the year at 6.6%.Note: This is an excerpt from the LatinFocus Consensus Forecast Latin America – June 2013. Published June 18th, 2013. The full report (128 pages, covering 11 major Latin American economies is available for immediate download at the FocusEconomics Online Store). For more information and a free sample of the report please visit our website.