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24 Jul 2014

Latin America: lower growth, reduced visibility

Andre Loes

by Andre Loes

Chief Economist for Latin America, HSBC

Latin America: lower growth, reduced visibility

The fall in confidence in Brazil has accelerated this year, partly because of the risk of energy rationing in 2015

The sharp decline in Latin America’s average growth in recent years seems to go beyond mere cyclical adjustment. It reflects commodity price weakness, country-specific issues in Argentina, Venezuela and Brazil, plus some easing of the region’s labour markets.

We have cut our prediction of the region’s average growth in 2014 to 1.7 per cent from 2.2 per cent previously, and expect just a mild recovery to 2.4 per cent in 2015 because prospects for the rest of the year are far from rosy, judging by deteriorating confidence indices in most Latin American countries. Colombia is an exception, with both consumer and business confidence either stable or improving during most of 2014.

Our growth forecasts for Chile have been cut from 3.6 per cent to 3.0 per cent this year and 4.5 per cent to 3.6 per cent in 2015 with Peru cut from 5.5 per cent to 4.8 per cent this year and from 6.1 per cent to 5.5 per cent next. This mainly reflects softening copper prices and their impact on private investment and exports.

We have cut our forecast for Brazil’s growth from 1.7 per cent to 1.1 per cent for 2014, with 1.2 per cent in 2015

The picture is more positive in Colombia, thanks to strong global oil prices. Improved infrastructure spending and monetary policy, quite loose until recently, mean this is the only commodity-related country where we expect growth to accelerate this year – to 4.9 per cent against 4.7 per cent in 2013.

But beyond the lacklustre growth, reduced visibility aggravates the situation – especially in Argentina and Venezuela.

Argentina started 2014 in recession and now faces the New York court’s ruling on its past debt obligations. Default would refocus policy on managing constrained international reserves, which could deepen and lengthen the recession, putting at risk our forecasts of a 1.0 per cent economic contraction in 2014 and 1.5 per cent growth in 2015.

Venezuela has been slow to move towards a new currency regime that could help restore order to its extremely unbalanced economy. We forecast a 3.6 per cent GDP contraction in 2014.

Then there is Brazil, where the potential for sharply different policies after October’s elections makes investment decisions difficult.

The fall in confidence in Brazil – especially in business – has accelerated this year, partly because of the risk of energy rationing in 2015. Hydroelectricity accounts for more than 80 per cent of electricity supply but a severe drought has left reservoirs low. Meanwhile, worsening consumer confidence reflects 6 per cent-plus inflation and, perhaps, concerns over weakening labour markets. We have cut our forecast for Brazil’s growth from 1.7 per cent to 1.1 per cent for 2014, with 1.2 per cent in 2015.

In Mexico we have cut our 2014 GDP growth forecast from 3.7 per cent to 2.7 per cent. Yet the second quarter brought indications that recovery is under way, with exports accelerating and consumer confidence improving. As the government has been executing the budgeted fiscal easing below our expectation, the acceleration towards higher growth will be gradual and we expect growth to accelerate materially only in 2015, when we are forecasting 3.8 per cent expansion.

This research was first published on 10 July 2014.
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