Argentina: Economic Snapshot for Latin America
Recovery stays on track in Q2 but headwinds to growth mount in Q3
Preliminary data revealed that growth held up in Latin America’s economy in the second quarter, despite global geopolitical uncertainty and political tensions in key economies. Regional GDP (excluding Venezuela) grew 1.9% over the same period last year in Q2, matching Q1’s result. Tailwinds from higher commodity prices, recovering private consumption and a solid global economy supported growth in the quarter. However, growth was uneven across countries and activity in the more vulnerable economies of Argentina and Brazil floundered.
Looking at the individual economies with GDP data available, economic dynamics strengthened in Chile, Colombia, Mexico and Peru in the second quarter. Chile and Peru were the region’s star performers with growth hitting multi-year highs thanks to surging investment and solid household spending. Similarly, the domestic economy drove growth in Colombia aided by rising economic sentiment. While a healthy services sector and rebound in industrial output supported Mexico’s economy—which held up well in the face of tough NAFTA talks and uncertainty related to the 1 July general election—growth still disappointed somewhat, landing shy of expectations.
In contrast, the region’s largest economy, Brazil, lost momentum in the second quarter. A nationwide truckers’ strike that began in May disrupted economic activity, as protests broke out over diesel price hikes which were introduced to help improve the government’s finances. Exports plunged as goods were unable to reach the nation’s ports, while falling consumer confidence weighed on household spending. Meanwhile, while official Q2 data is not available yet, Argentina’s economy is expected to have swung to contraction due a prolonged drought and financial crisis, which saw the peso plummet and interest rates soar.
More recently, headwinds have picked up in the third quarter, preventing a stronger recovery. Tightening global financial conditions and contagion from Turkey’s crisis caused a broad selloff in many of the region’s currencies, which will fan price pressures going forward. In particular, the selloff exacerbated Argentina’s already ongoing financial storm, and the peso plunged around 20% in just two days in August. In response, the Central Bank raised rates to 60%—the highest in the world—and President Mauricio Macri called on the IMF to accelerate disbursement under the country’s program. However, it remains to be seen if the measures will be enough to stem the peso’s slide and the country’s economic situation is still precarious.
Venezuela’s economy is also in a challenging situation and GDP is expected to remain in freefall due to plunging oil output, hyperinflation and shortages of basic goods. In an attempt to rein in the crisis, the government unveiled a raft of new measures in August including a new currency, the sovereign bolivar and minimum wage hikes. The government plans to anchor the currency to the petro, the country’s cryptocurrency, a move which is generating confusion. The reforms are unlikely to steady the economy, however, as they fail to tackle the fundamental issues of foreign exchange misalignments and chronic mismanagement.
Meanwhile, political risks are rising in Brazil, the region’s largest economy. The country heads to the polls on 7 October to decide the next president, and the outcome is highly uncertain, with a second-round presidential vote practically guaranteed. The clear front-runner in polling, former President Luiz Inácio da Silva (more commonly known simply as Lula) has been banned from the race and several candidates have a shot at making it to the runoff vote. Irrespective of who succeeds the current president, Michel Temer, the next president will face a tough challenge of trying to stoke a faster recovery, reduce bloated government accounts and navigate a likely divided Congress to force through legislation. So far centrist and reformist candidates are performing poorly in the polls.
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Argentina’s downward spiral dents Latin America outlook
Latin America’s 2018 growth prospects were downgraded this month for the second consecutive publication. The sizable downgrade to Argentina’s GDP forecast, as the country remains mired in a financial crisis, was the main driver behind the cut. Elevated inflation, drought and tough IMF-demanded austerity are expected to cause the country’s economy to contract this year and the crisis will also likely hurt its main trading partners through lower export demand. Outside of Argentina, tighter global financial conditions are also weighing on the region’s growth outlook as is political uncertainty in Brazil. On a positive note, NAFTA-related risks to Mexico’s economy have subsided somewhat, after the country struck a preliminary deal with the United States in August.
Regional GDP (excluding Venezuela) is now seen growing 1.9% this year, down 0.1 percentage points from last month’s forecast. Next year, regional growth is seen picking up pace and coming in at 2.6%. This month, Argentina and Brazil had their forecasts cut, along with Uruguay. In contrast, Bolivia, Chile, Colombia and Peru had their projections raised after positive Q2 GDP readings, while the rest of the region’s economies saw no changes to their forecasts.
Given the current economic conditions in Venezuela and the limited availability of official data, it has become extremely difficult to forecast the country’s economy. We have therefore removed Venezuela from the regional aggregates and discontinued its long-term forecasts. Rampant inflation, dwindling oil production and a dysfunctional exchange rate system are expected to keep Venezuela in a dire economic crisis, and the economy is seen contracting 12.1% this year, down 0.8 percentage points from last month’s forecast, and 4.2% in 2019.
BRAZIL | Elections take center stage, while economic data remains soft
GDP data confirmed that the recovery stuttered in the second quarter of the year, weighed on by economic disruptions from the truckers’ strike. Exports plunged due to transit disruptions, while household spending also slid in Q2, likely weighed on by deteriorating sentiment and a spike in inflation. More recent data for the third quarter continued to be downbeat, suggesting that a strong recovery has yet to materialize after the worst recession in the country’s modern history. Business and consumer confidence both fell in August amid a tense and uncertain political backdrop, and industrial production contracted in July. Moreover, the real plunged in recent weeks, boding poorly for inflationary pressures. Against a challenging economic backdrop, the country will head to the polls on 7 October in presidential and legislative elections. The battle for president remains crowded with a second-round vote nearly guaranteed. A centrist and reform-minded president is badly needed to navigate Brazil’s congress to pass tough reforms; however, Geraldo Alckmin, so far the most market-friendly candidate, is polling in fifth place.
Brazil’s prospects were downgraded for the fourth month in a row following a modest Q2 GDP outturn. In addition, a less supportive global backdrop and the weakening of the real cloud the country’s outlook. A market-friendly outcome to the election remains crucial to ensuring a sustainable recovery. FocusEconomics panelists now see the economy growing 1.6% this year, down 0.1 percentage points from last month’s forecast. Next year, GDP is seen growing 2.5%.
MEXICO | Government strikes trade deal with U.S.
Negotiators breathed a cautious sigh of relief in late August as they announced that Mexico and the United States had struck a deal to update NAFTA. Although the plan left the fate of Canada—the pact’s third partner country—in limbo, it calmed markets that had begun to fear the inevitable dissolution of the quarter-century-old agreement. Details of the bilateral talks suggest significant concessions by Mexico in the automotive sector, and early analyses of the tentative deal offered diverging views on its merits. The announcement came on the heels of revised second-quarter national accounts data, which confirmed weak first estimates held back by downbeat agricultural and industrial readings. Meanwhile, available data for the third quarter hints that a nascent domestically-driven turnaround could be afoot. In the wake of AMLO’s landslide victory on 1 July, economic sentiment has been riding high. That said, the manufacturing sector has yet to fully bounce back, and trade data in recent months has been far from encouraging.
Tight domestic and U.S. job markets, as well as improved private-sector lending, are expected to support household spending this year. Diminishing political uncertainty, meanwhile, should buoy investment. Although external trade remains a concern, healthy factory output in the U.S. is seen bolstering manufacturing exports, while a clearer path forward for NAFTA should keep supply chains intact. In politics, most analysts expect AMLO to govern as a big-spending centrist. FocusEconomics panelists expect growth of 2.2% in 2018, unchanged from last month’s estimate. For 2019, panelists see growth stable at 2.2%.
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ARGENTINA | Macri’s plea to IMF triggers further turmoil
President Mauricio Macri’s plea to the IMF on 29 August triggered a sharp selloff in the peso, precipitating the worst chapter thus far of this year’s still-unfolding economic crisis. Macri appealed to the IMF to accelerate the disbursements of its USD 50 billion stand-by arrangement (SBA) agreed to in June, a move that sent investors fleeing as the depths of the government’s fiscal woes grew more apparent. In exchange for bringing forward the disbursements, the government offered new fiscal reforms intended to speed up consolidation. Ahead of the IMF’s announcement on a revised SBA, the pain facing the economy continues to mount. Confidence is in the doldrums and tighter monetary conditions are bound to bruise spending and investment this quarter. Exacerbating matters, economic activity contracted in the second quarter as drought wreaked havoc on the agricultural sector, and a brewing corruption scandal in the construction sector is poised to weigh on activity through the remainder of the year.
Amid the hobbling of activity and the worsening of the crisis, the economy has likely entered recession and a majority of FocusEconomics Consensus Forecast analysts now see the economy contracting this year. That said, a number of analysts are still taking recent events into account. Nevertheless, spending and investment metrics are expected to plummet as oppressive financing conditions and elevated inflation take hold in the aftermath of the peso’s freefall. LatinFocus Consensus Forecast analysts see the economy contracting 1.2% this year, down 1.6 percentage points from last month’s forecast, before returning to feeble growth next year at 0.7% in 2019.
COLOMBIA | Domestic demand nudges up Q2 growth
The latest national accounts data showed that the economy accelerated in the second quarter on the back of a rise in domestic demand. Private consumption picked up pace as inflation dipped and consumer confidence jumped to a three-year high, while fixed investment rebounded on a recovery in machinery and equipment. Although exports rebounded in Q2 on higher oil prices, the external sector dragged more severely on growth as imports outpaced exports. Going into the third quarter, private consumption likely moderated as the unemployment rate crept back up in July and consumer confidence fell in the month. July’s PMI reading was higher than the previous month, however, signalling improved prospects for the manufacturing sector. On 27 August, President Iván Duque announced Colombia’s withdrawal from the Union of South American Nations (UNASUR) after criticising its accommodative stance on Venezuela and due to disagreements over which country should provide the regional bloc’s next president. The move to leave UNASUR is expected to be completed within the next six months.
The economy is expected to accelerate this year on higher oil prices, which should boost investment in the extractive sector. Planned infrastructure projects and rising investor confidence stemming from reduced political uncertainty should help lift growth. Duque’s plans to slash corporate taxes, however, could present challenges in meeting the fiscal target, unless they are offset with new sources of revenue. FocusEconomics panelists expect GDP to grow 2.7% in 2018, which is up 0.1 percentage points from last month’s forecast, and 3.1% in 2019.
MONETARY SECTOR | Regional inflation rises in July
A comprehensive estimate, without considering the current period of hyperinflation in Venezuela, revealed that inflation rose in July. FocusEconomics estimates that inflation in Latin America (excluding Venezuela) came in at 6.2%, above June’s 5.9%. Pass-through from a weak peso caused inflation to spike in Argentina, while Brazil also saw higher price pressures due to electricity price hikes, a weak real, and higher gas prices. In addition, higher energy prices caused inflation to build in the remaining economies, including in Mexico. However, a preliminary estimate for August revealed that inflation was broadly stable at 6.1%.
Following the peso’s downward spiral, policymakers in Argentina raised interest rates to an all-time high in August to stem the currency’s slide. Elsewhere in the region, rising interest rates in the U.S. have also eroded space for monetary easing as central bankers try to prevent capital flight. Policymakers in Peru left interest rates unchanged in August after they had paused the easing cycle in March.
Regional inflation excluding Venezuela is seen rising by the end of the year, coming in at 7.1%. The forecast was revised up 0.6 percentage points from last month’s projection, largely due to upward revisions to Argentina and Brazil’s inflation projections because of weaker currencies. Chile, Mexico and Uruguay’s inflation forecasts were also revised up. In 2019, inflation is seen ending the year at 5.3%. Venezuela is experiencing an episode of hyperinflation and is not included in the aggregate.
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Angela Bouzanis
Senior Economist