Latin America: Panelists revise down regional growth forecast yet again

The 2014 economic outlook for Latin America dropped again in January, continuing the uninterrupted downward trend that began in May 2013. LatinFocus Consensus Forecasts panelists expect the region’s GDP to expand 2.8% in 2014, which is slightly down compared to the 2.9% that was expected last month. Nevertheless, at the growth rate projected for 2014, Latin America will experience a modest improvement compared to the 2.7% expansion that has been estimated for 2013. This month’s downward revision was the result of a cut to the growth forecasts for Brazil, Paraguay, and Venezuela—the only Latin American economy that is expected to experience a contraction in output in 2014. Forecasters left unchanged the 2014 outlook for Argentina, Chile, Mexico, Peru and Uruguay, while growth forecasts for the remaining three countries surveyed improved over the previous month. Resilient domestic demand and advances in structural reforms in some countries are expected to support an increase in regional growth to 3.2% in 2015.

photo by JustinMcWilliams

photo by JustinMcWilliams

External risks from U.S. and Eurozone remain

Despite the healthier performance that is expected for the region this year, a number of external risks to the forecasts persist. At its 17–18 December meeting, the U.S. Federal Reserve announced that it would start to gradually reduce its asset purchase program (commonly referred to as quantitative easing). The Fed pointed out that the progress that has been made in relevant economic indicators, particularly in the labor market, warrants a scaling back of asset purchases. Although Latin America has made significant progress in reducing its external vulnerabilities and has accumulated international reserves (estimated USD 808 billion in 2013), the rolling-back of the Fed’s massive monetary stimulus has the potential to cause market volatility in emerging economies, particularly in the foreign exchange market.

In the Eurozone, risks of further debt defaults and the concern that the common-currency area could collapse have receded significantly. However, although the Eurozone economy will experience a recovery in 2014, its economic outlook is fraught with uncertainties. Some countries in the Euro area will continue to implement austerity measures in order to address the ongoing and severe fiscal woes. Moreover, persistent high unemployment is likely to temper growth.

Cloudy outlook for the Brazilian economy

Within Latin America, recent indicators paint a broadly negative picture for the Brazilian economy. Economic activity contracted a seasonally-adjusted 0.3% over the previous month in November and industrial output fell 0.2% in the same month. While retail sales increased a seasonally-adjusted 0.7% in November, consumer confidence retreated in December. On a positive note, business sentiment returned to optimistic territory in December for the first time since July of 2013. LatinFocus Consensus Forecast panelists maintain their view that the Brazilian economy is struggling to emerge from a scenario of disappointing growth, high inflation and simmering social discontent. Against this backdrop, forecasters polled by LatinFocus expect Brazilian GDP to expand 2.1% in 2014 (December’s forecast: +2.3%), which would represent a moderation compared to the 2.3% growth estimate for 2013. In 2015, the Brazilian economy is expected to grow 2.3%.

Recent data suggest upward momentum for Mexican economy

In Mexico, more recent data confirm that economic growth is gradually picking up. In October, economic activity expanded 1.3% over the same month of the previous year (September: +0.9% year-on-year) and the trade balance incurred a USD 339 million surplus in November as merchandise exports increased 0.8% annually. The manufacturing indicator is still above the 50-point threshold that separates expansion from contraction in the sector, although it did inch down in December. Moreover, Mexican households were more optimistic, albeit timidly so, regarding the current national economic situation and future economic prospects for the country in December.

Following a year of unprecedented changes, Mexico is facing a post-reform landscape in 2014. Most analysts agree that the government’s attention will be focused on getting the economy back on track in 2014  following the projected 1.2% expansion in the economy in 2013—Mexico’s worst result since 2009. President Pena Nieto has promised to ramp up public spending during his administration as part of the proposed stimulus, which will complement the recently-passed fiscal reform. The structural reforms are expected to deliver higher growth in the long run; energy reform is projected to be responsible for the lion’s share of the impact. A discussion regarding secondary laws is crucial to understanding the timing and final impact of the bills that have been approved thus far. Meanwhile, the government’s war against the drug cartels entered its eighth year, while crime in the state of Michoacan has resurged. Against this backdrop, LatinFocus Consensus Forecast panelists maintained their growth projections for 2014 unchanged over December’s 3.4%. For 2015, panelists see Mexican GDP growth accelerating to 3.9%.

Chile begins transition to new reform-focused government

In Chile, Michelle Bachelet from the center-left Nueva Mayoria coalition won the run-off presidential elections on 15 December with an overwhelming 62.0% of the votes. The 2014 political landscape in Chile will be dominated by the transition to the new government, whose drift to the left is raising questions as to whether Michelle Bachelet’s economic policy agenda will be substantially more radical than it was in her first term. Bachelet has proposed ambitious reforms, some of which will face strong opposition. Her platform is emphasizing tax changes and a reform of the education system.

Venezuelan economy decelerates in 2013

Elsewhere in the region, on 30 December Venezuela President Nicolas Maduro announced that GDP expanded 1.6% in 2013, which was down from the country’s 5.6% increase in 2012. Although the government vowed to maintain the bolivar at 6.30 per USD, it continued to expand the usage of the exchange rate that is offered through the Sicad (currently at around VEF 11.30 per USD), which reinforced the general perception in the analyst community that the government is implementing a stealth devaluation of the bolivar.

photo by HouseOf_Diegoo

photo by HouseOf_Diegoo

Concerns raised regarding independence of Venezuela’s Central Bank

Preliminary data show that inflation in Latin America climbed from 8.4% in November to 8.6% in December. The increase reflects higher inflation across the region. In Venezuela, an unusual press release from the Central Bank claimed that annual inflation moderated from 58.1% in November to 56.1% in December. The odd nature of the press release has sparked concerns that the government has been putting pressure on the Central Bank, thus jeopardizing its independence. LatinFocus Consensus Forecast panelists expect regional inflation to close 2014 at 8.2%, which is up 0.2 percentage points from last month’s forecast. For 2015, forecasters expect inflation to end at 7.6%.

Note: This is an excerpt from the LatinFocus Consensus Forecast Latin America – January 2014. Published January 21st, 2014. 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.

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