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11 Mar 2014

Another step down for Latin America

Andre Loes

by Andre Loes

Chief Economist for Latin America, HSBC

Another step down for Latin America (Getty Images/Glowimages)

Brazil's exports have been hit by import controls and tough economic conditions in neighbouring Argentina

The hope that Latin America had reached the bottom of its falling growth trend have proven false. We are making another round of downward revisions in our GDP forecasts for the region’s two biggest economies, Mexico and Brazil.

Our new forecast for Mexico of 3.7 per cent growth in 2014 still reflects a significant recovery from last year's 1.1 per cent and we believe the fundamental reasons behind our original 4.1 per cent forecast still apply – but with a delay. However in Brazil, the trend is for GDP growth to slow in 2014 and fall even further in 2015. Our forecast for Brazil has been cut from 2.2 per cent to 1.7 per cent this year, ahead of just 1.2 per cent for 2015.

Our forecast for Brazil has been cut from 2.2 per cent to 1.7 per cent this year, ahead of just 1.2 per cent for 2015

Each country has a different story behind the cuts. In Brazil, sticky inflation and investor concerns about its growing twin deficits could mean more fiscal austerity plus the clear indication that credit from the Brazilian development bank and the commercial state-owned banks will be more moderate in 2014.

Another headwind is the impact on Brazilian exports of Argentina’s lower growth, currency depreciation and import controls. Some 8 per cent of Brazil’s exports go to the neighbouring country and nine-tenths of them are manufactured goods, largely motor vehicles and parts.

Nature is not helping. A severe drought in south-east Brazil and the mid-west regions has reduced reservoirs to record low levels, bringing the risk of energy rationing – Brazil is largely a hydro-electricity country. Its experience of rationing in 2001 suggests that even if across-the-board rationing seems unlikely, the mere threat of it could cause a deterioration of confidence.

This combination of circumstances has made us cut this year’s GDP forecast and to expect only modest growth in 2015.

In Mexico, different factors are delaying the strong rebound that we still forecast.

An expected slowdown in US growth in the first half of 2014 has been made worse by a severe winter that led to temporary plant closures there, delaying Mexican exports. Meanwhile domestic consumption has been hit by the rise in VAT – a consequence of the fiscal reform approved last year – while Mexican government spending has grown less than expected, delaying the anticipated fiscal impulse. Mexico has budgeted a 4.1 per cent of GDP fiscal deficit for 2014, up from 2.9 per cent in 2013.

But while revising down our 2014 GDP growth forecast, we remain optimistic about the rebound, seeing a delay rather than a permanent reduction in the scope of the recovery.

Although we are forecasting a relatively modest pick up in the US for 2014, the experience of recent years suggests Mexican growth typically outpaces US growth, with 2013 an exception rather than the norm.

Lower growth in Brazil and Mexico, Latin America’s two large economies, means the region looks likely to have another year of lacklustre growth, averaging only the same 2.4 per cent achieved in 2013. Furthermore, the deteriorating political situation in Venezuela may lead to some loss of growth, while the Andes countries are subject to the risk of lower commodity prices.

This research was first published on 28 February 2014.
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