Latin America: Deteriorating outlook leads to lower growth forecasts for 2015

The deterioration in Latin America’s growth forecast continued this month, building on a streak of 11 months of downward revisions. LatinFocus Consensus Forecast panelists slashed the region’s GDP forecasts by 0.2 percentage points over the previous month. At the current 2.5% growth estimate, regional output is nearly half a percentage point lower than the rate of expansion predicted at the end of 2013 and 1.5 percentage points lower than the estimate recorded in the same month last year. March’s result reflects lower prospects for 7 of the 11 economies surveyed, including Brazil and Mexico, which account for nearly two thirds of the region’s total output. The outlook for the remaining 4 economies was not changed in March, being this the only month without any upward revision. For 2015, economists also cut the region’s growth prospects from the 3.2% increase expected in February to the current 3.1%.

Photo by Leandro's World Tour

Photo by Leandro’s World Tour

Recovery in global economy continues on improving growth prospects for developed economies

Growth prospects for the global economy, although weak, continue to suggest that a recovery is under way. In most developed economies, growth is expected to gain momentum through this year and the next. In the United States, although recent employment data showed that non-farm payrolls increased more than expected in February, the unemployment rate ticked up from the five-year-low of 6.6% registered in January to 6.7% in February. In the same month, the manufacturing PMI remained above the 50.0% threshold indicating expansion in the manufacturing sector.

Data releases also pointed to continued improvement in the Euro area, although weaknesses are still present. Recent Q4 data showed that the Eurozone’s GDP increased a seasonally-adjusted 0.3% over the previous quarter, which represented the third consecutive expansion. Moreover, households and businesses in Europe are becoming more confident about the recovery, with the European Commission’s economic sentiment indicator reaching the highest level since July 2011 in February.

Meanwhile, headwinds persist in most emerging economies. The annual National People’s Congress of China began on 5 March and Chinese officials set the country’s official targets for this year. Accordingly, the government unveiled a GDP target of 7.5%, which is unchanged compared to the previous year. Chinese officials pointed out, however, that the target would be flexible, signaling that authorities could tolerate lower growth rates. Most analysts predict that the GDP growth rate for this year will run below the official target. In fact, new economic data on industrial production, retail sales, and investment continue to signal that the economy is decelerating.

Currently, FocusEconomics Consensus Forecast panelists expect China to grow 7.5% in 2014 and 7.3% in 2015. Moreover, as part of Chinese authorities’ commitment to allow markets to play a greater role in the economy, the People’s Bank of China decided on 15 March to widen the exchange rate band. The Bank made a similar decision in April 2012.

Ukraine in spotlight due to economic uncertainty and ongoing political tension

Great uncertainty about Ukraine’s economic prospects has been prompted by a protracted period of political unrest, which culminated towards the end of February in the downfall of the president, Viktor Yanukovich. The country’s currency has come under strong pressure recently. In addition, a default on government debt as well as a banking crisis, together with the possibility that the country will lose the Crimean peninsula, is likely to push Ukraine back into recession this year. On top of that, the rising tensions between Ukraine, Russia and the rest of the Western world that took center stage over the past days may have economic repercussions that reach far beyond the region.

Brazil growth turns around, moves into the black

In Latin America, the economic news flow from Brazil was surprisingly positive. GDP increased 0.7% in Q4 over the previous quarter in seasonally-adjusted terms, marking a turnaround from the 0.5% decline tallied in Q3. Recent data also suggest that Brazil’s start to the year was better than expected. In January, economic activity and retail sales rebounded to positive growth while industrial production grew at the fastest pace in a year. However, in February, consumer confidence dropped to the lowest level in nearly five years and business sentiment was down a notch, which does not bode well for the economy going forward.

On the political front, the political fissure observed recently in the ruling coalition formed by the Dilma Rousseff’s Workers Party (PT) and the Brazilian Democratic Movement Party (PMDB) intensified when PMDB’s leader in the Chamber of Deputies (Lower House of Congress), Eduardo Cunha, went as far as to suggest that the alliance between PT and PMDB should come to an end. Although political observers point out that this is unlikely to occur, the tense relationship between these two parties is taking its toll on legislative work. The government has not been able to get bills approved, which may jeopardize the coalition’s position ahead of the October general elections.

Forecasters polled by LatinFocus Consensus Forecast cut Brazil’s GDP growth forecast for this year from the 2.1% expected last month to 1.8%. In 2015, the Brazilian economy is expected to grow 2.1%.

Mexico’s growth declines in 2013 marking slowest pace since 2009

In Mexico, recent GDP data confirmed a deceleration in the fourth quarter. The economy increased a dismal 0.7% year-on-year in Q4, driving full-year growth to just 1.1%, which marked the slowest pace since 2009. The latest indicators, however, suggest that economic activity is regaining its footing. In February, the IMEF manufacturing indicator rose slightly to 50.8 points, thus staying in expansion territory. Consumer confidence stabilized in February after having declined for five consecutive months. Since the ordinary congressional sessions began on 1 February, lawmakers have been grappling with a top-heavy agenda that includes changes to the by-laws of some of the major structural reforms that were passed in 2013. The Institutional Revolutionary Party (PRI) and the National Action Party (PAN) congressional leaders indicated that they are still committed to passing the energy reform by-laws by the end of April. However, opposition center-left Democratic Revolution Party (PRD) has insisted that by-laws associated with political, telecommunications and economic competition reforms precedent.

LatinFocus Consensus Forecast panelists lowered Mexico’s growth projections for 2014 from February’s 3.4% to the current 3.2%. For 2015, the country’s growth outlook was unchanged at the previous’ month 3.9%.

Elsewhere in the region, Michelle Bachelet, the new president of Chile who was sworn in on 11 March, pledged to introduce 50 new bills within her first 100 days in office, with priority going to tax, educational and constitutional reforms. Although Bachelet is very popular among citizens, the country’s slowing economic growth, coupled with less favorable external conditions, could force Bachelet to slow down the pace of the reform campaign. In Venezuela the government unveiled a new foreign currency law, which launched a new system called Sicad II that aims at improving access to the supply of U.S. dollars. Sicad II will not replace Sicad I, but will instead provide another mechanism for accessing the foreign exchange market.

Photo by Speaking Latino

Photo by Speaking Latino

LatinFocus panelists revise up regional inflation expectations to 10%

In February, higher inflation was observed across the region, with the exception of two countries. In Mexico, inflation fell in February and inflation stabilized at the previous month’s reading in Ecuador. LatinFocus panelists revised their inflation projections upward this month taking into consideration that Venezuela’s ballooning inflation seems unstoppable and Argentina’s new consumer price index is likely to result in higher inflation figures for the country. Panelists now project regional inflation to close 2014 at 10.0%, which is a full percentage point higher than last month’s forecast. If the forecast is reached, inflation will close the year at a double-digit rate for the first time since 2002. For 2015, forecasters also raised their inflation projections from the 8.2% in February to the current 8.5%.

Note: This is an excerpt from the LatinFocus Consensus Forecast Latin America – March 2014. Published March 18th, 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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