Firming recovery in Brazil as the consumer returns; political risk and NAFTA uncertainty weighs on regional economic outcomes
Boas Vibrações? (“Good Vibes”)
Latin Americans can breathe a sigh of relief - at least for now. After two years of recession, in 2015 (-0.2%) and 2016 (-1.2%) we estimate 2017 GDP growth at +1.4% and expect it to accelerate to +2.4% in 2018.
The buds of recovery have started to blossom with higher commodity prices (the S&P GSCI index was up 13% in 2017) and the Brazilian return to growth with +1.1% in 2017 and +2.5% in 2018 (forecast). These should further fuel the regional acceleration.
South American countries’ growth rates are converging again. Moreover, the improved macroeconomic environment has seen a less steep rise in the number of business insolvencies in 2017 with +17%, after +47% in 2016. The number of failures should stabilize in 2018 (+0%) for the first time in six years. Yet the busy political calendar could prevent the region from thriving at its pre-recession average growth rate (+3.5% from 2005 to 2014).
Buckle up! For a (modest) acceleration
We estimate the three major economies - Brazil, Mexico and Argentina - will contribute to 70% of the region’s growth in 2018. Export gains over four quarters reached USD +29.4bn in Mexico in Q3 2017 and USD +24.5bn in Brazil.
The recovery should now shift to the consumer. Retail sales have shown dynamism especially in Brazil where they posted their highest y/y growth in November since February 2014 (+5.1%). Besides, Euler Hermes upgraded two Brazilian consumer-related sectors in Q4 2017: Automotive and Agrifood. This bodes well for internal demand.
The upswing will be supported by (i) the trend reversal in unemployment in Brazil (12% in November 2017 down from 13.7% in March); (ii) accommodative monetary policies (post-disinflation in 2015-16), although the easing trend will likely slow down. Inflation is expected to ease to +5.7% in 2018 on average in Brazil, Mexico, Argentina, Chile, Colombia and Peru, after +7.4% in 2017. For the first time in four years, financial conditions are improving.
Country risk and economic growth forecasts (%) in Latin America
Beware of turbulences
If it were only for its external financing position, Latin America would be in for a safe ride, with comfortable foreign exchange reserves and more balanced external accounts as a result of strict adjustments. Yet 2018 could be the year of political turbulences.
Two major presidential elections are on the radar: Mexico (July) and Brazil (October). The Mexican anti-establishment candidate is gaining ground. It leverages nationalism as a response to the US’s tough foreign policy stance and the rejection of the center-right party’s hegemony. The Brazilian race has never been so open.
The possibility of a return to power of economic populism in both countries poses a risk to the reform momentum and hence to the business climate and public finances. On top of that, the volatility stemming from the North American Free Trade Agreement (NAFTA) negotiations could rein in economic outcomes, although the new treaty would not come into effect before 2019.