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Widespread economic slowdown in Latin America

May 13, 2019

Global growth stabilization under threat and widespread economic slowdown in Latin America set the tone for the year.


Please open the attached pdf to read the full report and forecasts.

Global Economy
Global growth stabilization under threat
Global growth to slow down with the new US-China trade tariffs. Latin American countries seem to be feeling the effects of this environment, which add to country-specific factors in many economies of the region.

Brazil
Economic activity loses momentum
We have reduced our growth forecasts for 2019 (to 1.0% from 1.3%) and 2020 (to 2.0% from 2.5%)  

Argentina
Heavier intervention
The monetary authority announced the possibility of more dollar sales and interest rates kept rising. The government also resorted to income policies, freezing regulated and some basic food prices.

Mexico
A difficult road to USMCA ratification
Ratification of the agreement is still at risk, creating an important source of uncertainty for the country’s economy.  

Chile
Trade tensions delay recovery
We revised our growth forecast down to 3.0% and now anticipate an even more gradual normalization of monetary policy.

Peru
Faster fiscal consolidation expected
The Ministry of Finance now expects a steeper fiscal consolidation path, with economic growth accelerating.

Colombia
Despite some positive signs, recovery remains sluggish
Disappointing activity by the start of the year and lower expected global growth led us to revise our growth forecast down both for this year and the next.


 

 


Widespread economic slowdown in Latin America

The global growth stabilization process, which was already pointing towards weak economic activity in recent months, is now under threat from a reescalation of the US-China Trade War. Additionally, a strong growth in 1Q19 in the U.S. looks only transitory, while government stimuli in China will likely be more contained this time around. 

As consequences of the slow global recovery, we see sluggish performance of commodity prices and international trade – posing downside risks for Emerging Markets – and slow growth in Europe, since it is highly dependent on the global manufacturing cycle. Combined, these factors will ultimately cause inflation in developed markets to remain subdued and may favor the discussion of adjustments in the Fed’s policy framework. 

Latin America is facing a widespread slowdown and it is clear that growth in the region is being curbed by country-specific factors as the election-induced stress in Argentina; fiscal challenges in Brazil and Colombia; uncertainties regarding the directions of domestic policies and the USMCA in Mexico. However, even Chile and Peru, which do not have major imbalances or significant political risks are facing a soft patch – and we read this as indication that the global environment is also behind the weakness in the region. Considering the intensification of the trade conflict between China and the U.S., we are reducing our growth forecasts for Chile, Colombia and Peru.

The deceleration also happens in Brazil, where we reduced again our growth forecasts to 1.0% in 2019 and 2.0% in 2020 (from 1.3% and 2.0%, respectively). Although there is a widely held perception that the economy is on hold because decision-makers are waiting for reforms, we believe that there is a more important factor behind the current weakness: our neutral interest rate seems to have become lower in recent past, driven down by expenditure cuts and the reduction of credit subsidies. Based on that, we understand that the current level of interest rates is not low enough for the economy to accelerate. Therefore, the pension reform is, in our view, rather than something that would simply trigger confidence-led growth, a trigger for growth through monetary stimulus – there is no room for rate cuts before the reform is voted, but there will be after it is.


 

 


Global Economy
Global growth stabilization under threat 

• Global growth stabilization, which was already pointing towards weak economic activity, is now under threat from a reescalation of the US-China Trade War   

• The weak global economy has three consequences: (1) commodity prices and global trade will remain sluggish, posing downside risks for Emerging Markets; (2) Europe will lag behind; and (3) DM inflation is set to remain subdued, favoring adjustment of the Fed framework.

• LatAm: a widespread slowdown

 

Please open the attached pdf to read the full report and forecasts.



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