Latin America Advisor

A Daily Publication of The Dialogue

What Will It Take for Latin America to Pick Up Growth?

IMF chief economist Maurice Obstfeld has called trade tensions “the greatest near-term threat to the world’s growth. // File Photo: IMF. IMF chief economist Maurice Obstfeld has called trade tensions “the greatest near-term threat to the world’s growth. // File Photo: IMF.

In the latest update to its World Economic Outlook, released in July, the International Monetary Fund lowered its economic growth forecast for Latin America to 1.6 percent this year. The IMF had forecast 2 percent growth this year for the region in its April report. The IMF cited factors including strikes and political tensions in Brazil, trade tensions hindering Mexico and tighter financial conditions in Argentina among the reasons for the lowered expectations for growth. Will economic conditions in the region continue worsening this year, or will there be a turnaround? What are the biggest threats to Latin America’s economic growth in the second half of this year? Which factors provide the most hope for a pickup in growth before the end of the year?

Alicia Bárcena, executive secretary of the United Nations Economic Commission for Latin America and the Caribbean: “The region has seen sustained GDP growth, which will continue in 2018 for a second consecutive year after contracting in 2015 and 2016. Internal aggregate demand in the region has bounced back, in light of an increase in private consumption and the recovery of investment owing to improved external conditions, especially in the terms of trade. However, various factors have led us to lower our forecasts published in April. The uncertainty generated by the ‘trade war’ and the revision of major trade agreements such as NAFTA and the Pacific Alliance suggest that external stimuli could negatively affect the region’s growth in the future. Additionally, the increase in energy prices and the possible inflationary pressures that may result could push up domestic interest rates, therefore restricting the potential growth effects of credit for consumption and investment. Persistent imbalances in some economies have diminished their capacity to invest, thus stifling potential growth. The process of fiscal consolidation adopted in some countries implies a lower fiscal impulse than initially estimated. In short, there are several reasons why we have revised our growth forecasts for the region downward, but we are confident that it will continue growing, albeit at low rates.”

Alfredo Coutiño, director for Latin America at Moody’s Analytics: “Despite some adverse factors hitting Argentina, Brazil and Mexico, Latin America is heading to a second year of recovery in 2018. During the first half of the year, the three biggest economies faced headwinds that induced slower economic activity, accompanied by volatility in financial markets. Fortunately, most of those negative factors are under control or even disappeared, which raises the probability of more normal performance for the second half or even the possibility of an economic rebound. In Argentina, the financial support provided by the IMF and the quick response from the government helped contain financial turbulence and reduced the possibility of an economic crisis. In Mexico, the celebration of a pristine election and unquestionable results eliminated the risk of post-election frictions and disruptions. Only Brazil continues to be under political and social tensions in light of the upcoming election in October, in addition to the disruption caused by the workers’ strike in May and June. The main risk for the region continues to be the anti-trade measures implemented by the U.S. government and its continuous threats, which raise the probability of a trade war. A second risk is the negative consequences of the Fed’s monetary normalization, where higher interest rates impose pressures on Latin American rates and shake domestic financial markets. Moreover, the ongoing depreciation of Latin American currencies, resulting in part from the external threats, is a factor that will continue to improve the competitiveness of Latin American exports. This, together with the improvement in the terms of trade generated by favorable commodity prices, will continue to make net exports an important engine of Latin America’s economic performance. The region is heading to post growth of around 1.6 percent in 2018, after 1.3 percent in 2017, if the situation in Brazil does not deteriorate further.”

Barbara Kotschwar, senior private sector specialist at the World Bank:“Latin America came into 2018 with an economic bounce; by mid-year, however, the growth spurt has lost steam, as reflected in the downward revisions of the growth numbers. Although higher commodity prices may boost growth prospects for countries such as Chile and Colombia, the factors that led to the downward growth revisions—tighter financial conditions, weaker currencies, market stress in the large South American countries, political turmoil and a truckers’ strike in Brazil—will continue to influence growth prospects for the rest of the year. Stable elections in Colombia and Mexico mitigate the political risk somewhat, but the region’s outlook continues to be subject to headwinds from rising global protectionism and, particularly for Mexico, the uncertain outcome of NAFTA renegotiations. Effects of recent U.S. tariff policies, if sustained, should begin to be felt in the second half of this year, and would temper the second quarter’s uptick in the U.S. growth effect on Latin American economies. On a positive note, successful conclusion of a mutual recognition agreement in the Pacific Alliance, steps toward closer relations between the Pacific Alliance and the Mercosur and continuing Mercosur-E.U. negotiations sends signals that the region is not following a protectionist trend. Any trade and investment effects, however, will likely not manifest in time to recover the growth momentum.”

Carlos de Sousa, senior economist for Latin America at Oxford Economics: “The economic outlook has worsened for Latin America on aggregate for this year. We also expect regional GDP to expand by 1.6 percent in 2018, a considerable downgrade from our more optimistic 2.4 percent projection from six months ago. The main culprits lie in Brazil and Argentina. In the case of Brazil, a truck drivers’ strike in May caused economic activity to nosedive by 3.3 percent on the month, but leading indicators for June point to a V-shaped recovery, corroborating our view that the strikes alone will have only a temporary impact on activity. However, the strikes took place at a terrible moment for Brazil, just as the country started to face important external headwinds such as an appreciating U.S. dollar (increasing inflationary pressures), worsening sentiment toward emerging markets (increasing the government’s borrowing costs) and weaker demand from Argentina and Europe. In Argentina, it is not only the souring market sentiment that caused a 26 percent depreciation of the peso, which was evidently overvalued in real terms back in April and forced the country to seek an IMF financial assistance program, the country is also undergoing its harshest drought in 50 years. To put it into perspective, economic activity fell 5.8 percent year-over-year in May, but, excluding the agricultural sector, was up 0.5 percent, as agricultural production fell by a staggering 35 percent year-over-year. Looking ahead, things are moving in the right direction for Argentina even if growth will likely be null in 2018. Next year will be very challenging though, due to the presidential election. The rest of the region is looking much better. Our outlook for Mexico remains roughly unchanged as AMLO’s election was perfectly foreseeable. Chile’s economy is booming despite the weakness of copper and the peso, and the outlook for Colombia is looking brighter amid higher oil prices and the election of a business-friendly president.”

Desmond Lachman, resident fellow at the American Enterprise Institute: “Sadly, there are all too many reasons to believe that the IMF will prove to have been too optimistic in forecasting that over the next year or two the Latin American economy will avoid a hard landing. Among the more important of these reasons is that the United States, the world’s largest economy, is running an inappropriately expansive fiscal policy at this late stage in the U.S. economic cycle. That is bound to force global interests rates higher and to accelerate the reversal of capital flows to the emerging market economies that is already in evidence. There are also other reasons: President Trump is now leading us toward a global trade and currency war; China, the world’s second-largest economy and the main consumer of international commodities, is slowing after many years of artificially credit-induced economic growth; Brazil, South America’s largest economy, is on an unsustainable fiscal path at a time that it is entering a period of considerable political uncertainty; and it is highly probable that it is only a matter of time before the new Italian government precipitates another round of the Eurozone sovereign debt crisis. Of course, there is always a chance that the unusual constellation of risks listed above does not materialize and that the IMF’s rosy Latin American economic scenario comes to pass. However, it would seem that all the clues are pointing in the opposite direction.”

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