With the second half of 2014 on the horizon, the economic outlook for Latin America deteriorated again this month. This month’s forecast for the region continued the 12-month-long streak of downward revisions. In May, LatinFocus Consensus Forecast panelists cut the region’s GDP growth projections to 2.2% from the 2.3% expected last month. At this rate the region will experience a mild deceleration compared to 2013’s estimated expansion of 2.6%.
This month’s forecast resulted from lower growth prospects for Chile and Paraguay, as well as for Argentina and Venezuela, which were the two economies in the region expected to experience an economic contraction. Panelists polled by LatinFocus left their growth estimates unchanged for 6 of the 11 economies surveyed, including Brazil and Mexico. Ecuador was the only country for which prospects improved; recent GDP data show that the economy grew 4.5% in 2013. The result came in below the 5.1% expansion registered in 2012. For 2015, panelists expect the region’s GDP to pick up to 2.9% (April: 3.0%), which mainly reflects stronger global demand and a series of structural reforms that several countries in the region are embarking on.
Most analysts stuck to their cautious views regarding global economic prospects. Panelists have observed that two opposing forces are driving the outlook for the global economy: On one hand, the recovery in most developed economies—particularly in the United States and in the Eurozone—is still resilient. On the other hand, volatility in financial markets, slower growth rates in key emerging economies and geopolitical tensions are casting a shadow upon what would otherwise be a more promising global outlook.
United States and Eurozone Still on Path to Recovery
The U.S. economy appears to be gaining momentum. Although an advance GDP estimate showed that the economy literally froze in the first quarter due to severe weather conditions, recent data suggest that the economy is still on the path to recovery. The ongoing improvements in the U.S. economy also suggest that, although the Federal Reserve (Fed) will not hike interest rates anytime soon, it will continue winding down its asset purchase program. In the Eurozone, recent economic indicators support analysts’ views that the common-currency bloc’s recovery is holding up relatively well. The return to growth of these two advanced economies will provide a supportive backdrop for exports to the rest of the world and, ultimately, a boost to global economic growth.
Downside risks to the global outlook persist, however, as many emerging economies have been under pressure due to a number of factors: the Fed’s tapering of quantitative easing, concerns that the Chinese economy will decelerate this year and further risk of military escalation in Ukraine. The next few weeks will be especially critical in Ukraine. Most analysts and observers expect that additional fragmentation will take place in the country as a result of the secessionist referenda that the eastern provinces held on 11 May. Additionally, violence may resurge ahead of the presidential elections scheduled for 25 May. The International Monetary Fund (IMF) recently approved a USD 17.1 billion rescue package for Ukraine. The West, led by the United States and Germany, imposed additional sanctions on individuals close to the Putin administration, which further heightened uncertainty in the region.
Region’s Largest Economies on Diverging Growth Path
Latin America’s GDP growth forecasts for 2014 have been on the downside for the past 13 months and they are likely to continue to disappoint going forward. Moreover, the latest data continue to confirm analysts’ views of a diverging growth path for the region’s largest economies, Brazil and Mexico. In Brazil, retail trade data showed that sales rose a mild 0.2% over the previous month in February, which came in below the 0.4% increase tallied in January. In addition, industrial production contracted 0.5% over the previous month in March, which was below the flat reading registered in February. Confidence indicators plunged to five-year lows in April; the results are consistent with consumers and businesses’ views that economic growth is moderating. LatinFocus Consensus Forecast panelists expect that Brazil’s GDP will increase 1.8% in 2014, which is unchanged from last month’s forecast. Next year, economic growth is expected to pick up slightly to 2.0%.
In Mexico, although the economy got off to a soft start at the beginning of the year, recent data suggest that it is gradually gaining momentum. Data for February showed that economic activity increased 1.7% annually, which followed the 1.0% expansion observed in January. Moreover, the Mexican external sector is beginning to feel the economic tailwinds of a recovery in the U.S.: in March, the trade balance recorded its second consecutive surplus due to strong growth in exports, while remittances expanded at the fastest pace in over two years. Leading indicators, however, showed contrasting results in April. While consumer confidence reached a 6-month high, the PMI manufacturing indicator fell to its lowest level in 14 months. This month, LatinFocus Consensus Forecast panelists left Mexico’s growth prospects for 2014 unchanged at the 3.1% that was expected last month. For 2015, forecasters see economic growth accelerating to 3.9% as the U.S. economy is expected to recover and the initial impact of the reforms is likely to lift economic growth.
Various Reforms Expected to Improve Economic Performance
Analysts have observed that some countries within the region such as Mexico, Chile and Paraguay are undertaking bold structural reform processes on both the political and economic fronts, which are expected to improve economic performance in each of the countries in the medium- and long-term. Conversely, other countries such as Brazil, Argentina and Venezuela are at a crossroads for embarking on a reformist agenda. Most analysts recognize that major improvements in economic performance in these countries will be put on hold unless they go through political change or undertake an electoral process.
In Mexico, the energy reform by-laws presented to Congress on 30 April are aimed at breaking up the monopoly on the all-important energy sector that state-owned Pemex has held for 76 year . In Chile, on 23 April, President Michelle Bachelet presented a bill to Congress that would reform the electoral law. More recently, on 6 May, her administration unveiled a first-draft bill to reform the country’s education system as presented during her electoral campaign. Since taking office in August 2013, Paraguayan President Horacio Cartes has been focusing on improving social-welfare programs as well as other key areas in an effort to reduce the poverty gap. A new law for investment in infrastructure with public and private partnerships has the potential to boost jobs and improve economic growth going forward. In addition, a recent tax reform in the agricultural sector—aimed at increasing the tax take—will enable the government to spend on infrastructure and social projects.
2014 Inflation Could Reach Highest Level Since 1996
Inflation expectations in the region rose again this month. LatinFocus Consensus Forecast panelists lifted their inflation projections and now expect the regional average to close 2014 at 11.5%, which is higher than last month’s 10.7% estimate. If inflation does in fact come in at this rate, it will close the year at the highest level since 1996. Analysts cut their inflation projections for 2015 slightly from April’s 9.3% to 9.2%. On the monetary policy front, most Central Banks in the region left interest rates unchanged last month; only Colombia and Brazil did not stay put. On 25 April, the Colombian Central Bank (BanRep) surprised the markets by raising the reference rate from 3.25% to 3.50%. Meanwhile, on 2 April, the Brazilian Central Bank hiked the SELIC rate from 10.75% to 11.00%.
Note: This is an excerpt from the LatinFocus Consensus Forecast Latin America – May 2014. Published May 13th, 2014. The full report (129 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.