The deterioration in Latin America’s 2014 economic outlook has yet to stop six months in to 2014. Following on the downward trend that began in May 2013, LatinFocus panelists now expect the region’s GDP to expand 2.0%, which is down from the 2.2% that was expected last month. At this rate, Latin America will experience a slowdown compared to last year’s estimated expansion of 2.6%. June’s downward revision originated from lower growth prospects for the region’s behemoths Brazil and Mexico, for Chile, Peru and Uruguay, and for Argentina and Venezuela, which are the only two economies expected to experience a recession. Panelists left their growth projections unchanged for Bolivia and Ecuador. Colombia and Paraguay were the only countries for which prospects improved. For 2015, forecasters also cut the region’s growth projections from the 2.9% expected last month to the current 2.8%.
The deteriorating outlook for the region comes within a context of lower growth prospects for the global economy. Against a backdrop of downward revisions to the United States and the Euro area, FocusEconomics panelists cut their growth projections for the global economy from the 3.1% expected last month to 3.0%. The United States’ downbeat Q1 GDP result was the key driver behind the downward revision to the country’s outlook, although more recent information suggests that the recovery in the U.S. economy is gaining traction. That said, the U.S. Federal Reserve still did not seem to be in a hurry to normalize monetary conditions beyond tapering its asset purchase program.
In the Euro area, analysts were disappointed by lackluster GDP growth in the first quarter. Nonetheless, leading indicators suggest that the modest recovery is going to continue. To support the incipient recovery, European Central Bank loosened its monetary policy and lowered the refinancing rate from 0.25% to 0.15% at its 5 June meeting. In a historic move, the Bank also cut its deposit rate from 0.00% to minus 0.10%. Furthermore, the ECB will lend funds (TLTRO) to banks for up to four years at a fixed rate of 0.25%. Some analysts agree that the unconventional measure is unlikely to give a boost to the economy and that it is more likely paving the way for the use of other measures such as quantitative easing.
Signs of Improvement in Chinese Economy
Meanwhile, recent economic indicators in China showed an improvement even though the economy registered slower growth at the beginning of the year. Chinese authorities unveiled a new targeted cut of 50 basis points to the reserve requirement ratio for commercial banks that lend to the agriculture sector and for small and medium enterprises. However, most analysts agree that the impact of the cut will be limited because the cap for major banks was maintained at 20.0%.
Despite World Cup Preparations, Brazilian Economy Suffers Quarterly Slowdown
In Latin America, Q1 data for Brazil showed that GDP increased a paltry 0.2% over the previous quarter, which was half the growth rate registered in Q4. The slowdown reflected a notable weakness in domestic demand. In addition, coincident indicators for April carried over slack in domestic demand: Retail sales fell a seasonally-adjusted 0.4% over the previous month (March: -0.5% month-on-month) and industrial production contracted 0.3% (March: -0.5% mom). Furthermore, leading indicators for May continued to point to a deceleration in economic activity. The business confidence indicator took a nosedive, hitting a low that has not been seen since June 2009. Consumer sentiment also plummeted and reached its lowest level since April 2009.
With the World Cup kickoff on 12 June, all eyes have turned to Brazil and, while the coming month is sure to be exciting for the country, most analysts warn that its economic and social dynamics are still a great cause of concern. Furthermore, ahead of the presidential election in October, opinion polls showed again that Dilma Rouseff’s popularity remains in free fall and that approval of her administration is at the lowest level yet. LatinFocus Consensus Forecast panelists cut their GDP growth forecasts for both this year and next. They now expect the Brazilian economy to grow 1.5% in 2014, which is down 0.3 percentage points from last month’s forecast. In 2015, the economy is seen experiencing a slight acceleration, with GDP expected to grow 1.8% (previous estimate: +2.0%).
Mexico’s Economy Disappoints in Q1, but Shows Signs of Improvements to Come
The Mexican economy got off to a weak start at the outset of the year. In the first quarter, GDP increased 1.8% annually. Although the reading marked an improvement over the tepid 0.7% increase registered in the fourth quarter, it was still disappointing. Economic indicators related to manufacturing activity, however, suggest that economic activity improved in the second quarter. The manufacturing PMI indicator rose in May, remaining at a level consistent with strong growth. On the external front, data was positive again in April: the trade balance registered its second consecutive month of surplus and growth in remittances was positive.
Although more recent data suggest that economic activity will improve in the second quarter, the disappointing GDP figure in the first quarter prompted the majority of LatinFocus Consensus Forecast panelists to lower Mexico’s economic outlook for 2014. Participants surveyed in June now expect the economy to expand 2.7% this year, which is down from the 3.1% that was expected last month. For 2015, forecasters see economic growth accelerating to 3.9%.
In Mexico, discussions regarding the energy reform by-laws are currently taking place in the Senate (upper house of Congress). Mexican lawmakers are expected to clarify the rules for private sector investment participation in the energy sector despite attempts from the opposition left-wing PRD party (Party of the Democratic Revolution) to delay the debate until after the World Cup. The results of the discussions will determine how successful the reform will be in transforming the energy sector into a key driver for more sustained economic growth in the medium- and long-term (see details on page 78).
Colombian Voters Reelect Santos, Show Support for Peace Talks with FARC
Elsewhere in the region, elections took center stage in Colombia. According to official results, incumbent Juan Manuel Santos won the election with 51.0% of the vote and beat his rival Oscar Ivan Zuluaga who received 45.0%. The peace talks with the Revolutionary Armed Forces of Colombia (FARC) were the centerpiece of the election and President Santos has pledged to end the country’s armed conflict that has lasted over five decades with a peace process (see details on page 64).
U.S. Supreme Court Rules Against Argentina in Holdouts Case, Tax Reform Under Review in Chile
In Argentina, on 16 June, the U.S. Supreme Court ruled against the government’s appeal in the holdouts case, which may force Argentina to pay USD 1.3 billion to bondholders who rejected to participate in the 2005 and 2010 debt restructuring. If the Argentinian government refuses to pay it could be forced to enter into a technical default (see details on page 21).
In Chile, President Michelle Bachelet’s tax reform presented to the Chamber of Deputies (lower house) was passed with relative ease. Unlike some other proposals from the President, the tax bill requires a simple majority. With the Chamber of Deputies hurdle cleared, the debate has moved to the Senate (the upper house) where the bill is expected to receive close scrutiny. In addition, President Bachelet presented two draft bills as part of the educational reform.
Regional Inflation Prospects Remain Stable
Inflation expectations in the region stabilized this month. LatinFocus participants left their inflation forecasts unchanged and expect the regional average to close 2014 at 11.5%. Analysts raised their inflation projections for 2015 from May’s 9.2% to 9.3%. On the monetary policy front, most Central Banks in the region left interest rates unchanged last month; only Colombia and Mexico did not stay put. On 30 May, the Colombian Central Bank raised the reference rate by 25 basis points to 3.50%, which followed a similar increase in April. Meanwhile, on 6 June, the Mexican Central Bank surprisingly cut the target for the overnight interest rate by 50 basis points to 3.00%, triggered by signs of weak economic activity.Note: This is an excerpt from the LatinFocus Consensus Forecast Latin America – June 2014.. Published June 17, 2014. The full report 129 pages (wait the final report), 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.