The outlook for Latin America deteriorated again in November, marking the seventh consecutive downward revision to the 2014 growth forecast. LatinFocus Consensus Forecast panelists expect regional GDP to expand 3.0% in 2014, which is down 0.1 percentage points from last month’s forecast. This month’s downward revision reflects a cut in the growth prospects for Argentina, Chile, Uruguay and Venezuela, while growth prospects for Bolivia and Ecuador were revised upward. For 2014, forecasters maintained their growth projections for 5 of the 11 economies surveyed, including regional giants Brazil and Mexico. For 2013, panelists raised their projections by 0.1 percentage points for regional GDP growth to 2.7%, putting an end to the nearly uninterrupted trend of downward revisions that began in June 2012.
Global economic recovery continues despite moderation
The global economic outlook continues to recover, although it has moderated somewhat. Downward risks to the global landscape persist, mainly due to a deterioration in some BRIC economies, particularly Russia and India. Meanwhile, the 2014 growth outlook for the U.S. economy remained stable in November. The political gridlock that led to the partial shutdown of the government was alleviated temporarily on 16 October and funding for operations was secured until mid-January. Nevertheless, analysts continue to take these developments into account, as the shutdown is likely to have a negative impact on growth in the second half of 2013. Moreover, prolonged negotiations between Republicans and Democrats regarding the country’s debt ceiling have increased uncertainty over the country’s outlook. In the Eurozone, recent economic indicators support the idea that the common-currency area will return to moderate growth next year. The road to recovery, however, remains fraught with uncertainties.
Stable outlook for regional giants Brazil and Mexico
Within Latin America, analysts polled by LatinFocus maintained their 2014 growth projections for regional heavyweights Brazil and Mexico this month. In August, Brazilian economic activity rose 0.1% over the previous month, which contrasted 0.3% decline observed in July. Industrial output returned to positive growth in September, increasing 0.7% over the previous month, which was weaker than the markets had expected. Conversely, leading indicators point to a tenuous downward trajectory in consumption and investment in the months ahead—both consumer and business confidence indicators fell in October. LatinFocus Consensus Forecast panelists expect Brazilian GDP to expand 2.5% this year. For 2014, participants expect it to grow 2.3%, which is unchanged from last month’s forecast.
Mexican economy expected to grow amid mixed signals
In Mexico, economic activity showed positive growth for a second consecutive month in August. Nevertheless, the 0.8% year-on-year expansion undershot both July’s 1.9% increase and market expectations. The result suggests modest GDP growth in Q3, although it may be slower than in Q2, as the hurricanes’ negative impact will be reflected in September’s data. Meanwhile, the external sector continues to show healthy developments; Mexican exports grew solidly in September. Conversely, the manufacturing indicator fell in October after three consecutive months of improvement. The index is again below the 50-point threshold that separates expansion from contraction in the manufacturing sector.
President Pena Nieto’s administration remains committed to its reform agenda. Additionally, both the Senate and the Lower House of Congress approved the fiscal bill the government proposed with just minor changes. The bill includes: a controversial increase from 11.0% to 16.0% in the VAT rate charged in the municipalities at the borders; a capital gains tax on stock market transactions; and a new levy on soft drinks and junk food. The approval of the fiscal reform package alleviated pressure on the government, enabling it to concentrate on getting Congress to pass the energy reform bill.
While the Mexican government’s push for economic reforms promises to boost economic growth in the medium- to long-term, short-term economic headwinds persist amid uncertainty in the U.S. economy, sluggish domestic demand and a negative weather-related impact. LatinFocus Consensus Forecast panelists maintained their growth projections for 2014 at the 3.5% expected in October. However, for 2013, panelists cut their GDP growth forecasts by 0.1 percentage points from last month’s forecast and now expect the Mexican economy to grow just 1.2%.
Elsewhere in the region, recent data show that Argentina’s economic activity expanded 4.0% annually in August and thus grew at the slowest pace in four months. In Chile, economic activity decelerated from 5.3% in July to 4.1% in August. Meanwhile, Colombian industrial production contracted 3.9% in August over the same month last year, which represents a deterioration compared to the 0.2% increase observed in July.
Panelists raise regional inflation forecast
Against a backdrop of contained inflationary pressures and sluggish domestic demand, central banks across the region had to decide at their latest policy meetings whether to lower or maintain interest rates in order to support economic growth. In a move broadly expected by the markets, Mexico’s Central Bank cut the overnight policy rate by 25 basis points to 3.50%. Conversely, monetary authorities in Chile and Peru surprisingly trimmed their key monetary policy rates by 25 basis points to 4.75% and 4.00%, respectively. Brazil continues to be the exception; the Central Bank is still involved in a tightening cycle. At the Bank’s latest meeting, authorities raised the SELIC rate by another 50 basis points to 9.50%, a decision that comes amid concerns over inflationary pressures.
Preliminary data show that inflation in Latin America rose from 7.7% in September to 8.0% in October. The increase mainly reflects that unrelenting ballooning inflation in Venezuela more than offset declining inflation nearly everywhere else in the region. Venezuela’s inflation, which has soared unstoppably since March, exceeded the 50.0% mark in October, reaching its highest level since 1997. Moreover, an index measuring the scarcity of basic goods also rose to a record-high in the same month.
LatinFocus Consensus Forecast panelists expect regional inflation to close 2014 at 7.1%, which is up 0.1 percentage points from last month’s forecast. For 2013, forecasters expect inflation to end at 8.0%, which is up 0.3 percentage points from last month’s Consensus.Note: This is an excerpt from the LatinFocus Consensus Forecast Latin America – November 2013. Published November 12th, 2013. The full report (125 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.