Latin America: Growth outlook deteriorates, continuing the downward trend

Growth prospects for Latin America deteriorated again in October, continuing the almost uninterrupted downward trend that began in June 2012. LatinFocus panelists cut their 2013 regional GDP growth forecast to 2.6%, down 0.2 percentage points over the previous month. This month’s downward revision was mainly the result of another substantial cut in the growth forecast for Mexico. Prospects for Peru were also revised down, marking the sixth consecutive downward revision. Conversely, growth forecasts for Argentina, Bolivia, Paraguay and Venezuela were revised up, while prospects for five economies remained unchanged. In addition, the panel cut the 2014 regional prospects by 0.1 percentage points over last month. Analysts now expect regional output to grow by 3.1% next year.

The downward revision comes within the context of a stable growth outlook for the global economy; an improvement in the projections for the Euro area, Japan and the United Kingdom offset lower forecasts for Canada and the BRIC economies. Meanwhile, the outlook for the United States stabilized in October, following two consecutive months of downward revision. The global outlook has been dominated by the Fed’s decision in September to postpone tapering and the political gridlock in the United States. So far, the impasse on the budget led to the first government shutdown in 17 years. The shutdown is likely to dent economic growth in the fourth quarter. Economists are even more concerned about the 17 October deadline to raise the county’s debt ceiling. Failure to do so could send the United States in default for the first time ever.

photo by terbeck

photo by terbeck

Outlook for the Mexican economy deteriorates further

In Mexico, although economic growth was weak in the first half of 2013, recent data suggest that the economy is on an upward trajectory. Economic activity expanded 1.7% in July over the same month last year, which contrasted the 0.4% contraction registered in June. In addition, exports accelerated in August and the manufacturing index increased for the third consecutive month in September. The index now sits only a whisker below the 50-point threshold that separates expansion from contraction in the manufacturing sector. Nevertheless, the recovery may be thwarted by the impact of the tropical storm Manuel and hurricane Ingrid, which hit the country in mid-September. The double blow was one of Mexico’s most severe natural disasters, killing over a hundred people and disrupting economic activity in various states along the coasts. According to the Ministry of Finance, the storms caused an estimated USD 6 billion in damages and are likely to shave 0.1 percentage points off 2013 growth. As a result, the government will exhaust the MXN 12 billion (USD 1.0 billion) natural disaster fund to finance reconstruction.

Meanwhile, uncertainty regarding the details and timeline of the proposed energy and fiscal reforms remains high as the political debate intensifies. In October opposition PAN and PRD parties reiterated their insistence on the approval of the electoral reform before supporting the government bills.

While the government’s move on economic reforms promises to boost economic growth in the medium- to long-term, short-term prospects remain eclipsed by the uncertainty in the U.S. economy, weak domestic demand in Mexico and the negative effect of the two hurricanes. Consequently, LatinFocus Consensus Forecast panelists cut their growth projections for this year by 0.8 percentage points over last month (on top of the 0.7 percentage-point cut seen in September) and now expect the Mexican economy to grow just 1.3%. The panel also revised Mexico’s growth forecast for 2014 from the 3.7% expected last month to the current 3.5%.

Brazilian outlook stabilizes but sluggishness in economic activity threatens growth

The outlook for Brazil stabilized this month. After GDP expanded faster than expected in the second quarter, recent economic data sent mixed signals for the second half of the year. Industrial production recorded flat growth over the previous month in August, which followed the 2.4% contraction registered in July. While the August reading marked an improvement compared to the previous month, it missed market expectations of a 0.2% rise. More recent data suggest that private consumption will gain traction. Consumer confidence rose for a second straight month in September, bouncing from the four-year low registered in July. Conversely, business confidence fell to its lowest level in over four years in September, falling further into pessimistic territory. Against this backdrop, analysts polled by LatinFocus left their GDP growth forecast for 2013 unchanged over the previous month at 2.4% but cut their 2014 projections by 0.2 percentage points and now see the Brazilian economy slowing to 2.3%.

Regional inflation rises in August

Inflationary pressures in Latin America are reappearing, with inflation rising from 7.3% in July to 7.4% in August. The rise shows how lower inflation in Brazil and Mexico could not compensate surging inflation in Venezuela and higher prices in Uruguay. Venezuela’s inflation, which has been soaring unstoppably since March of this year, exceeded the 40% threshold in July and remained on an upward trajectory in September.

photo by hanneorla

photo by hanneorla

Over the past month, most central banks in Latin America stayed put, with the exception of the Brazilian Central Bank, which decided to raise the benchmark SELIC interest rate by 50 basis points. The move follows an equivalent rate hike in August and reflects the Bank’s main concern; the reappearance of inflationary pressures due to recent weakening of the real. In Mexico, Banxico’s next monetary policy meeting is scheduled for 25 October. Most analysts expect Banxico to shave off another 25 basis points from its policy rate to support economic growth—following a similar rate cut in September. In Uruguay, monetary officials reiterated their restrictive stance and reaffirmed their long-term monetary aggregate (M1+) growth target of 8.0%. For the third quarter, the Uruguayan Central Bank had set a 12.5%-13.0% target range for M1+ annual growth in order to stem inflationary pressures and halt the weakening of the peso. However, M1+ increased 14.8% in Q3, well above both the long-term target of 8% and the aforementioned target range. As a consequence, the Central Bank increased the target range for M1+ annual growth of 15.0% to 17.0% for Q4.

LatinFocus Consensus Forecast panelists expect regional inflation to close the year at 7.7%, which is up 0.2 percentage points from last month’s projection. For 2014, panelists forecast inflation to drop to 7.0%, which is also up 0.2 percentage points from last month’s Consensus.

Note: This is an excerpt from the LatinFocus Consensus Forecast Latin America – October 2013. Published October 15th, 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.

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