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Why Is Latin America Slowing Down?
Big three disappoint, while Chile, Colombia and Peru underwhelm.
BY LATIN AMERICA ADVISOR
Inter-American Dialogue
The International Monetary Fund in July cut its economic growth forecast for Latin America this year by more than half, from 1.4 percent down to 0.6 percent. What factors are weighing on the region’s economic growth? Which Latin America and the Caribbean countries are expected to fare the best and worst, and how likely is economic growth to bounce back next year? How much are external factors, including China’s outlook, influencing economic trends in Latin America, and will this continue into the foreseeable future?
Alberto Ramos, managing director and head of Latin America economic research at Goldman Sachs in New York: The beginning of the year across Latin America was unquestionably challenging, particularly so on the growth front for the largest economies. The real business cycle dynamics in Brazil and Mexico ended up frustrating earlier expectations to a very significant extent: real GDP growth flattened out in last year’s fourth quarter, only to dip into outright negative territory during this year’s first quarter. Argentina remained mired in recession under the weight of tight fiscal and monetary policy and purchasing power, as well as eroding high inflation. Venezuela is in a long-lasting economic depression with no end in sight. Finally, the small open Andean economies also witnessed a significant loss of the growth forward momentum in the first quarter despite low policy and political uncertainty and an absence of major macroeconomic imbalances. In Argentina, Brazil and Mexico, the disappointing growth dynamics reflected mostly domestic factors. The political and policy environment remained unsettled. Policy and political uncertainty remained high by historical standards, turning consumers more conservative in their spending and firms’ more defensive in their investment decisions. With the exception of Venezuela, and perhaps also Mexico, we expect the growth profile to firm in this year’s second half, supported chiefly by further monetary accommodation, facilitated to a significant extent by the significant dovish shift of the policy rate outlook in both developed and emerging markets. In Brazil, progress on an ambitious liberal reform agenda is expected to contribute to firm sentiment indicators and through leverage a cyclical recovery that has so far been the weakest on record. In Mexico, policy direction uncertainty is expected to continue to weigh down on investment spending and growth overall. Overall, the Andean economies—Chile, Colombia and Peru—are expected to deliver the highest growth rates in Latin America, but even there, it will be underwhelming in absolute terms (3 percent or lower).
Ernesto Revilla, member of the Advisor board and head of Latin American economics at Citigroup: The global outlook has weakened, and Latin America has been no exception. Real GDP is expected to grow by 1 percent in 2019, below its 10-year average of 2 percent. In Mexico, expectations for 2019 growth have been revised down to 0.2 percent as higher policy uncertainty takes its toll on investment, coupled with a tight fiscal policy. The investment mood among the private sector is set out to remain hesitant. In Brazil, the recovery remains disappointing, and the growth forecast has been trimmed to 0.7 percent for 2019. We don’t see a clear driver after the pension reform is approved. The behavior of animal spirits will depend on the government’s success in pushing further its reform agenda. The Andean nations have been able to hold better than their peers within this context of deteriorating outlooks for growth. While we have downgraded our forecasts for Chile and Peru, they remain at a fairly healthy 2.7 percent and 3 percent, respectively. In Chile, the deceleration has been tied to the mining sector and in Peru to investment. Nonetheless, we expect a pickup soon. Colombia is the only country among the big Latin American economies that is expected to grow more than it did last year. Looking forward, higher market volatility and an escalation of trade tensions between China and the United States pose some risks to our outlook. In order to mitigate them, the region needs to continue working in improving its economic fundamentals. We believe Latin America has plenty of untapped potential, and increasing productivity is a challenge that can be accomplished.
Alfredo Coutiño, director for Latin America at Moody’s Analytics: Latin America has been facing economic difficulties in 2019, which have reduced the region’s possibilities to recover. Growth has been revised downward significantly, from 2 percent at the beginning of the year to a rate lower than 1 percent at present. Domestic and external factors have been playing against this year’s recovery. First, the escalation of a tariff war initiated by the U.S. government against its main trading partners introduced a lot of uncertainty, affecting trade volumes and investment decisions. Second, the deceleration of China’s economy has affected the demand for Latin American primary exports. Third, the region has not been able to accelerate productive investment given the lack of reforms, but also because of uncertain political changes in Brazil and Mexico. Lastly, the prolonged recession in Venezuela and Argentina has dragged down the region’s growth. There are three groups of major countries in the region’s economic picture: In deceleration (Chile, Mexico and Peru), in moderate acceleration (Colombia, Panama and, to a lesser extent, Brazil), and in recession (Argentina, Venezuela and Nicaragua). As a result, we expect Latin America to decelerate in 2019 to a rate around 0.6 percent, from 1 percent in 2018. However, since Mexico’s economy remains weak, and growth has been revised from 2 percent to 0.5 percent, the region’s growth is still subject to further revision. The main risks on the horizon are the materialization of a trade war, a faster and deeper global deceleration and a prolonged anemia of investment in the region given governments’ inability to deepen structural changes. In the end, Latin America’s recovery is postponed for one more year, at least.
Republished with permission from the Inter-American Dialogue's daily Latin America Advisor
