Latin America remains a two-speed region, but although the starting points differ, growth is now decelerating across the board. Risk such as China’s slowdown, wobbles in commodity markets, and the end of the domestic demand boom have turned into actual headwinds.
It has become more difficult for Latin America’s economies to find shelter from these pressures. We have thus reduced our growth forecasts again and now see the region growing by 2.7 per cent in 2013 compared to 2.8 per cent last year.
Our forecast changes for 2013 growth affect Brazil (to 2.4 per cent from 2.6 per cent), Chile (to 4.5 per cent from 4.8 per cent), Peru (to 5.8 per cent from 6.2 per cent), Uruguay (to 3.5 per cent from 4 per cent) and Mexico (to 2.9 per cent from 3.2 per cent) while Venezuela’s contraction expands (to -0.9 per cent from -0.6 per cent).
What has driven these changes? First, the slowdown in China, where our economists have cut their growth forecasts to 7.4 per cent for both 2013 and 2014. Second, linked to that, is the risk of commodity weakness, which especially affects Chile and Peru.
It has become more difficult for Latin America’s economies to find shelter from these pressures
Third, there is the demand slowdown and other domestic factors such as political uncertainty. These dominate our views on Brazil, Venezuela and Argentina. Indeed, for Argentina we have reduced our 2014 GDP growth forecast from 3 per cent to 1 per cent, despite leaving our 2013 forecast unchanged at 2.5 per cent.
Latin America proved resilient after the 2008 global recession because of the policy fire power deployed to boost growth. Now, some of that fire power has run out. The policy ammunition in the region is still reasonable – although declining – but it is unequally distributed. Chile and especially Peru have leeway to be counter-cyclical and Brazil, Colombia, Panama, Mexico and Uruguay retain a reasonable amount of policy fire power.
But recent developments in Brazil have been negative and it has been losing policy flexibility, especially as inflation pressures reduce monetary policy options. And Argentina and Venezuela retain a very limited ability to apply any counter-cyclical effort in case the external headwinds worsen.
In some ways the risks ahead have not changed. With the US economy set for a better second half – an important tailwind for Mexico – the path of China’s economy, commodity prices and the country-specific woes that hurt domestic demand remain the key risks.
But for Brazil, the wave of protests adds further short-term risks. And the new risk factor is one not specific to Latin America but to all emerging markets – the threat of the US Federal Reserve reducing global dollar liquidity. Growing current-account deficits increase the vulnerability of many countries in the region to potential capital outflows.
This research was first published on 1 July 2013.