The growth outlook for Latin America deteriorated again this month, continuing the downward trend that began in June of last year. LatinFocus panelists cut their 2013 regional GDP growth forecast to 2.8%, down 0.1 percentage points from last month. This month’s downward revision mainly reflects a sizeable cut in the growth forecast for Mexico. Prospects for Chile and Peru were also revised down while the growth forecasts for Argentina, Brazil and Venezuela were revised up. The panel cut the 2014 regional prospects by 0.2 percentage points over last month; forecasters now project regional output to grow by 3.2%.
The deterioration in the regional outlook comes within the context of stabilizing growth forecasts for the global economy, where an improvement in prospects for the Euro area and the United Kingdom compensated for worsening projections for the United States. The outlook for the United States deteriorated compared to the previous month as economists expect the country’s fiscal retrenchment as well as the anticipated quantitative easing to weigh on the economy.
Cloudy outlook for Mexico
In Mexico, GDP increased 1.5% year-on-year in the second quarter. While the expansion marks an acceleration compared to the 0.6% growth recorded in the first quarter, the reading came in well below market expectations of a 2.3% increase. In addition, more recent data do not indicate a clear-cut recovery trajectory for the Mexican economy. While the manufacturing index increased for the second consecutive month in August, consumer confidence edged down after having reached a six-month high in July.
Meanwhile, President Enrique Pena Nieto’s administration continues to move the country’s reform agenda forward. President Pena Nieto unveiled the long-awaited fiscal reform package in early September after having presented a ground-breaking energy sector reform in August. The fiscal reform bill includes a series of tax increases, the elimination of various deductions and a simplification of the tax regime. Economists were underwhelmed by the scope of the tax reform. The government refrained from broadening the tax base due to its fear that such a move would stifle private consumption even more.
While the government’s move on economic reforms promises to buttress economic growth in the medium- to long-term, short-term prospects remain overshadowed by both the U.S. economy’s less-favorable outlook and sluggish domestic demand in Mexico (as evidenced by the dismal Q2 GDP reading). Consequently, LatinFocus Consensus Forecast panelists cut their growth projections for this year by 0.7 percentage points over last month and now expect the Mexican economy to grow just 2.1%. This month’s 2013 GDP growth forecast marks the fifth straight downward revision. It has now been reduced by more than a full percentage point compared to April’s 3.5% forecast. The panel sees growth accelerating to 3.7% in 2014, which is down 0.2 percentage points compared to last month.
Brazilian GDP growth represents highest growth rate in over three years
More positive news came from Brazil where GDP grew a seasonally-adjusted 1.5% over the previous quarter in Q2. The expansion was well above market expectations of a 0.9% rise and represented the fastest pace in more than three years. The rebound was mainly driven by stronger net exports, although private consumption remained sluggish. More recent indicators suggest that private consumption is also turning the corner. Retail sales in July recorded the strongest growth since January 2012 and consumer confidence recovered in August from July’s four-year low, which should provide a welcome boost to domestic demand in the third quarter. Conversely, business confidence fell to its lowest point in four years in August. In addition, economic activity contracted 0.3% and industrial production contracted 2.0% in July. Against this ambiguous backdrop, analysts surveyed by LatinFocus raised their GDP growth forecast for 2013 a notch over last month to 2.4% but cut their 2014 projections by 0.2 percentage points and now see the Brazilian economy growing just 2.5%.
Panelists revise regional inflation projection upwards
Inflation in Latin America inched down from 7.3% in June to 7.2% in July. The drop mainly reflects lower inflation in Brazil and Mexico, which offset rising inflation in Venezuela. Venezuela’s inflation, which has been increasing since March of this year, exceeded the 40% threshold in July and remained on an upward trajectory in August. Monetary authorities in Latin America moved in contrary directions over the course of the past month. The Brazilian Central Bank decided to raise the benchmark SELIC interest rate by 50 basis points, following an equivalent rate hike in July. The move came amid growing concerns over inflationary pressures, which are due in part to the persistent weakening of the Brazilian real. The Central Bank of Mexico, in contrast, cut its policy rate by 25 basis points, citing the fact that economic growth was slower than expected. LatinFocus Consensus Forecast panelists expect regional inflation to close the year at 7.5%, which is up 0.2 percentage points from last month’s projection. For 2014, panelists forecast inflation to drop to 6.8%.Note: This is an excerpt from the LatinFocus Consensus Forecast Latin America – September 2013. Published September 17th, 2013. The full report (126 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.