Latin American economies still shining? - January 2012

British Embassy Brasilia

Summary

From Mexico in the North to Chile in the South, economic growth in Latin America is slowing. Brazil, by far the region’s biggest economy, may be in a shallow recession. Does this signify a marked shift in the region’s prospects? The fundamentals remain strong and the region is more robust to external shocks than in 2008/9. So while not immune from problems elsewhere, Latin America remains a good bet.

Detail

2010 saw explosive, Asian-style growth across Latin America.  Brazil, which accounts for over 40% of the region’s GDP, grew by 7.5%.  The second and third largest, Mexico and Argentina, by 5.5% and 9.2% respectively.  Commentators were struck by the apparent resilience of the region, the speed of the recovery following the 2008 crisis and, crucially, the contrast between growth in the region and the anaemic recoveries seen in Europe and the US.

A year on and this resilience is being tested.  Growth is slowing across the region, but inflationary pressures remain; growth in key developed country export markets remains weak; and even Chinese growth is starting to ease.  Added to this, the slow pace of crucial structural reforms in many countries, most notably Brazil, and other internal barriers to sustainable growth raises questions about medium and long term growth prospects.  Does this suggest that the optimism of a year ago was misplaced?  Is the sheen coming off Latin America?

The case for the prosecution

Growth has slowed across the region.  The most striking example is that of Brazil, where solid first and second quarters of 2011 have been followed by what some expect to be two quarters of negative growth (albeit very slight negative growth) resulting in an annual GDP growth of about 3%.  Argentina is expected to record 8% growth in 2011 but this figure masks a marked slowdown in the second half of the year (like Brazil).  Expansion of 3-4% is forecast for 2012.

Others are slowing too.  The economies of Chile, Uruguay and Peru are being affected more than many commentators predicted by reduced commodity prices, a cut-back in emerging market appetite and the slowdown in Brazil.

At the same time, inflationary pressures have remained.  In most countries inflation rates are close to or above target, leaving limited room for monetary stimulus.  In Brazil, inflation may have squeezed under the target’s upper-bound (6.5%) at the end of the year, but an extremely tight labour market and an increase of over 14% in the minimum wage for 2012, with the associated increases in indexed Government expenditure, will ensure continued significant upward inflationary pressure.  In Argentina, inflation remains above 20% with no immediate prospects of this coming down.  Even in Venezuela most expect an uptick of inflation in 2012 despite the state controlling prices.

On the other hand...

But the trend is far from consistent.  In Mexico, while growth has slowed the economy has shown resilience, despite the continued weakness of the US economy, and is expected to expand by over 3.9% in 2011.  Inflation remains under control, despite both the recent depreciation of the Peso and increases in food prices.  Continued high unemployment also reduces the likelihood of wage inflation.  Exchange rate uncertainties have, however, made it less likely that the Central Bank will choose to run an expansionary monetary policy in early 2012.  Mexico’s economy is expected to grow by 3.2% in 2012, based on domestic demand and the expected continuing recovery of the US industrial sector.

In Colombia, Venezuela, Ecuador and Bolivia growth has remained strong, based largely on the price of oil.  Country-specific factors such as: government spending in Venezuela and strong domestic demand in Colombia have also contributed.  In Peru, domestic consumption remains strong and the government has implemented stimulus packages to offset the global headwinds.  Peru is forecast to grow at 5% in 2012.

In addition, economic fundamentals remain strong across the region.  In Brazil, the Government argue that the dip in growth is a result of action taken at the end of 2010 and beginning of 2011 to cool the then overheating economy.  This, coupled with a rapidly deteriorating external environment has led to a sharper slowdown than expected, and so the brakes are being released, including through rate cuts.  The Brazilian Government expect growth to return in Q4 of 2011 and continue in 2012.  The IMF agrees.  Christine Lagarde said that she believed Brazil was the best placed of all major economies to withstand another global economic slowdown, having the policy space to introduce more stimulus, should the need arise.

In conclusion

With any region as big as Latin America (Sao Paulo is a ten-hour flight from Mexico City), the variations between the countries can be significant.  In this region factors such as: openness of the economy to trade; dependence on oil or other commodity exports; and strength of the domestic market, all play their part in determining how each country’s economy is responding to the growing global economic uncertainty.  

Despite the variations, there are some common themes.  The most notable being that the fundamentals remain strong.  The optimism of the past twelve months is not misplaced.  Sovereign debts are low, international reserves 60% higher than in 2008, there are no IMF programmes and poverty has shrunk almost across the board. That should not detract from the internal challenges that most countries face in tackling structural reforms, security, and increasing competitiveness.  Nor should we underplay the risks facing this region from the international environment.  But the problems of Latin America are broadly those of excess, and how to make the most of real potential.  Arguably, these are problems many developed countries would gladly face.

Disclaimer

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