In the last month of 2013, the growth outlook for Latin America deteriorated again and continued on the uninterrupted downward trend that began in May. Heading into 2014, LatinFocus Consensus Forecast panelists project regional GDP to grow 2.9% during the year, which is down 0.1 percentage points over last month’s estimate. Nonetheless, the growth rate projected for 2014 represents a modest acceleration compared to the 2.6% expansion estimated for 2013. This month’s downward revision was the result of a cut in the growth estimates for 7 out of 11 economies surveyed, including a substantial reduction in the growth forecast for Venezuela. Forecasters polled by LatinFocus left the 2014 growth outlook unchanged for Brazil, Paraguay and Uruguay, while growth prospects for Bolivia improved. For 2013, LatinFocus participants lowered Latin America’s growth forecast from the 2.7% increase expected last month to a 2.6% expansion.
Global economy continues to recover
On the international stage, recovery from the financial and economic crisis over the past five years continues to gain traction. The global economy is expected to grow 3.2% in 2014, which is up from an estimated 2.4% expansion this year. Faster growth in the United States and a recovery in the Eurozone are expected to fuel the region’s expansion in 2014. FocusEconomics Consensus Forecasts panelists expect the U.S. economy to expand 2.7% in 2014, which is up from an estimated 1.6% growth rate this year. The Eurozone is expected to bounce back from an estimated 0.4% contraction this year to a 1.0% expansion in 2014.
Mixed pictures for regional heavyweights Brazil and Mexico
Latin America’s two largest economies, Brazil and Mexico, performed differently in the third quarter. This is a sign of divergence in the economic momentum of the two economies. Brazilian GDP contracted 0.5% over the previous quarter in seasonally-adjusted terms in Q3, which marked the first decrease since Q1 2009. In addition, other indicators that came in at the close of Q3 corroborated the gloomier picture. Growth in retail sales slowed in October and industrial output inched up from 0.5% growth in September to a meager 0.6% increase in October, signaling a weak start to Q4. Meanwhile, forward-looking indicators, such as business and consumer confidence, improved only slightly in November.
Brazil will take center stage next year due to the FIFA World Cup that will take place in June and July, followed by the first round of presidential elections on 5 October. Analysts polled by LatinFocus left their 2014 growth projections unchanged for Brazil and expect the economy to expand at the 2.3% pace they expected last month. For 2013, however, participants cut Brazilian GDP growth forecasts and now expect the economy to increase 2.4%, which is down 0.1 percentage points from last month’s forecast.
Mexico’s GDP expanded a seasonally-adjusted 0.8% over the previous quarter in Q3, bouncing back from the 0.6% contraction recorded in Q2. In year-on-year terms, however, GDP growth was weak again, recording a 1.3% increase. Recent economic data suggest that growth is gaining momentum in Q4. Merchandise exports increased for the second consecutive month in October and the IMEF manufacturing index rose slightly above 50 points in November, indicating that the manufacturing sector is expanding.
Mexico’s Nieta pursues ambitious economic reform agenda
After a year in office, President Enrique Pena Nieto began to pursue an ambitious agenda of reforms that are designed to boost Mexico’s economic growth in the long-term. The government and the main opposition parties signed the Pact for Mexico in December 2012, paving the way for a series of legislative breakthroughs in education, telecoms, banking and fiscal reforms. However, after this promising start, the Pact came under strain when the center-left Democratic Revolution Party (PRD) withdrew from the accord. The government is also under pressure because the energy reform has to go through Congress by 15 December.
On 4 December, the Senate passed the political reform, which is now in the hands of the Chamber of Deputies. Approval of the reform was set as a prerequisite by the center-right National Action Party (PAN) for negotiating the energy reform. With the bill in the Chamber of Deputies, the Senate could move on to discussing energy reform and on 9 December, senators from the PRI and PAN parties presented a draft of the energy bill. The bill, which seeks to rewrite the constitution, would allow the government to open the energy sector and to be able to offer three types of contracts to domestic and foreign private firms: profit sharing, production sharing and licenses. In addition, the reform envisages the creation of strong and independent regulators and a sovereign oil fund, which would be overseen by the Central Bank. Most analysts see this as more ambitious than the government’s previous proposal, which only provided private firms a share in oil extraction profits.
The economic reforms in Mexico are expected to boost growth in the medium- to long-term. However, short-term economic headwinds persist and thus LatinFocus Consensus Forecast panelists lowered their growth projections for 2014 from the 3.5% expected in November to the current 3.4%. For this year, panelists maintained their GDP growth forecasts at the 1.2% that had been expected in November.
Elsewhere in Latin America, Chile’s GDP increased 4.7% in Q3 over the same period last year (Q2: +4.1% year-on-year); it was mainly driven by healthy growth in exports. Nonetheless, growth is trending slower and uncertainty regarding economic policy persists. The new administration takes office in March 2014. It will likely be lead by center-left Michelle Bachelet, who is expected to win the 15 December presidential run-off election.
In Peru, the economy decelerated sharply, falling from a 5.6% increase in Q2 to a 4.4% expansion in Q3, which is the slowest pace since Q4 2009. Colombian industrial production contracted 1.8% annually in September (August: -3.9% yoy), which represents the fourth contraction the last five months. Meanwhile, politics took center stage in Venezuela. President Nicolas Maduro survived the first major test of his seven-month administration when his ruling PSUV won the majority of votes in the 8 December local elections. President Maduro was granted the power to rule by decree for up to a year and therefore he can pass laws without congressional approval. Nonetheless, divisions within the ruling PSUV party persist, which increases the risk for political turmoil in the year ahead.
Panelists revise up regional inflation forecasts on results for Venezuela
Preliminary data show that inflation in Latin America remained stable in November at the 8.0% registered in October. Lower inflation in most countries compensated for the skyrocketing inflation in Venezuela, which is hovering above 50.0%, reaching its highest level since 1997. LatinFocus Consensus Forecast panelists expect regional inflation to close 2014 at 8.0%, which is up 0.9 percentage points from last month’s forecast. The upward revision was largely driven by a 12.4 percentage-point increase to 2014 Venezuela’s inflation projection compared to last month, as panelists are already pricing in the likelihood of a devaluation of the bolivar that could happen any time next year. For 2013, forecasters expect inflation to end at 8.2%, which is up 0.2 percentage points from last month’s estimate.Note: This is an excerpt from the LatinFocus Consensus Forecast Latin America – December 2013. Published December 10th, 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.