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Tuesday, January 26, 2016

Latin America's 2016 GDP Growth Forecasts
by Ricardo Aceves

Following a year of recession, analysts surveyed by FocusEconomics this month foresee a gradual recovery in the region and expect Latin America’s economy to expand 0.3% in 2016, which marked the 13th consecutive downward revision. Behind the cut in the 2016 GDP growth forecast was a reduction in the projections for almost all of the economies included in the survey:

Regional currencies face turbulent start to 2016

Lower commodities prices, an economic deceleration in major trading partners and persistent domestic challenges among Latin America’s largest economies represented significant headwinds to the region in 2015. More complete data show that the region’s economic deterioration worsened in the third quarter of last year. A GDP estimate elaborated by FocusEconomics shows that the region’s economy contracted 0.7% annually in Q3, which contrasted the 0.1% increase observed in Q2. Q3’s decrease marked the first contraction in economic activity since Q3 2009 and mainly reflected deteriorating economic conditions in Brazil, which is by far the region’s largest economy. Moreover, recently-released data suggest that economic activity did not stabilize in the last quarter of 2015.

Following heightened volatility in the region’s currencies in the last three months of 2015, in early 2016 many major Latin American currencies continued to tumble. Their weakening against the U.S. dollar reflected turbulence in global financial markets and sharp falls in commodities prices, particularly prices for oil and basic metals. Moreover, the slowdown in China and inertia from the Federal Reserve’s December rate hike put additional pressure on the currencies.

Latin America is starting out 2016 facing fundamental political and economic challenges. The vast majority of economies in the region are major commodities exporters and prices for these materials are expected to remain low, at least through the first half of the year due to well-supplied markets. In the second half, commodities prices are expected to see a gradual increase, mainly due to expectations of stronger global economic growth and a fall in inventories, although they are seen decreasing slowly. Meanwhile, key countries in the region will continue to face political challenges going forward, including: the evolution of the fiscal and political crises in Brazil, President Mauricio Macri’s desire to quickly address economic imbalances in Argentina, presidential elections in Peru, and Venezuela’s newly-elected National Assembly’s struggle with the administration of Nicolás Maduro.

Following a year of recession, better performance expected in 2016

Last year, Latin America entered into recession for the first time since the global financial crisis hit the region in 2009 with an expected contraction of 0.3%. The region’s lackluster performance was mainly the result of a deep contraction in the Brazilian economy, which is expected to have decreased 3.6%. In addition, crisis-hit Venezuela likely experienced its worst economic recession in many years, with GDP likely plunging 8.2%.

Looking to 2016, the analysts surveyed for this month’s LatinFocus Consensus Forecast foresee a gradual recovery in the region, while at the same time major currencies are seen weakening further. Forecasters expect Latin America’s economy to expand 0.3% in 2016. That said, this month’s survey again showed that analysts have an even more pessimistic view regarding the region’s growth prospects. Forecasters cut the 2016 projection by 0.3 percentage points in January, which marked the 13th consecutive downward revision. Next year, the region’s economy is expected to perform better and increase 2.4%.

Behind the cut in the 2016 GDP growth forecast was a reduction in the projections for almost all of the economies included in the survey. Peru was the only economy for which panelists did not change the GDP growth projection due to expectations related to this year’s presidential elections, as well as a stronger-than-expected recovery supported by new mining projects entering into operation, a stabilization in private investment and an increase in public spending. 
 
Regional inflation ends 2015 at a 20-year high 

Inflation in Latin America ended 2015 at the highest level in two decades. Regional inflation shot up to 18.8% in 2015 from 10.4% in 2014 due to swift increases in inflation in Brazil, Colombia, Peru, Uruguay. Venezuela recently released official inflation data through September 2015, which confirmed that inflationary pressures have remained unabated and have soared past 100%. Analysts surveyed by FocusEconomics estimate that inflation in Venezuela ended 2015 above the 180% mark.

Inflation is expected to remain elevated this year and Central Banks in the region will likely continue the tightening cycle that began at the end of last year. Nevertheless, analysts expect that, given lackluster economic growth, the tightening cycle will end soon.

Inflation is projected to continue rising this year and is seen ending 2016 at 19.1%, according to the panel of analysts FocusEconomics surveyed this month. The projection was up 1.6 percentage points from last month and reflected upward revisions to the inflation outlook for 5 of the 11 economies surveyed. The inflation forecasts for 3 economies were revised down, while Chile, Paraguay and Uruguay were the only countries for which forecasts were left unchanged. Venezuela continues to be a source of concern as inflation is expected to remain near 200% in 2016.

Fuente: FOCUSECONOMICS

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