Latin America has Hurdles to Overcome in 2014

2013 was hardly a standout year economically speaking for Latin America. Real GDP growth for the region as a whole came in at just 2.7%, compared to 4.6% across emerging and developing countries. The region’s powerhouse economies – Brazil and Mexico – which between them account for 58.3% of Latin American GDP, both saw sluggish rates of growth of 2.3% and 1.1% respectively, with Brazil narrowly escaping recession in the 4th quarter. With Brazil hosting the World Cup all eyes are on the region in 2014, but although growth is strengthening, it is still set to disappoint in some quarters.

Real GDP Growth: 2008-2016

Source: Euromonitor International from national statistics/Eurostat/OECD/UN/IMF

Note: Forecasts begin in 2014

Brazil Stalls…

Real GDP growth in 2014 is set to remain broadly stable over 2013 at 2.4% – but with risks on the downside. Inflation, although moderating, is likely to remain significantly higher than the Central Bank’s 4.5% target. This has left the Central Bank walking a tightrope between high inflation on the one hand and stagnant economic growth on the other.

 

Unfortunately for Brazil, its most crucial problems are structural: private consumption has hitherto been the engine of growth, with growth of consumer expenditure peaking at 10.9% in 2010, but this model has reached the end of its course and consumers are being squeezed by high interest rates. The government must enact reforms, and is recognising this with the recent announcement of fiscal tightening to lower the budget deficit, but it remains to be seen if this can be implemented particularly with a Presidential election scheduled for October and a low growth outlook scenario.

Underlying this weak performance, Brazil has many strengths, including its sheer scale – in 2013 Brazil was the world’s 7th largest economy (in PPP terms), had its 6th largest population and spans its 5th largest land area. It is also home to a vast array of natural resources, key to which is its agribusiness sector and also a young population. Yet without far-reaching reform, the economy is in danger of returning to the bad old days.

Whilst Mexico Reforms

Turning to Mexico, 2013 saw Mexico’s worst economic performance since 2009. In 2014, growth is projected to accelerate to 3.3% with consumer expenditure increasing by 4.2%. The Mexican president has announced a whole raft of reforms encompassing telecoms, education and energy, aimed at increasing the country’s competitiveness. The key point for the economy in 2014 and beyond is to see whether the government is able to successfully implement these reforms.

Apart from the reform agenda, Mexico is also benefiting from a strong US economy. More than three quarters of Mexican exports are destined for the USA so the performance of the US economy always has a strong bearing on the domestic economy.

And Colombia and Peru Expand

Two smaller, but still important, economies have been stealing the limelight from Brazil and Mexico. Colombia (the region’s 4th largest economy) and Peru (its 7th largest) are both expected to outperform the regional average this year with real GDP growth of 4.2% and 5.4% respectively. For Peru this marks the 5th straight year of growth of 5% and above and for Colombia it signifies a welcome return to rates of growth above 4% which should be carried through in coming years.

  • Colombia has managed to move away from its image as a state held for ransom by drugs and violence and is now heralded as one of the most successful economies in the region; with a friendly business environment, a robust export sector, sound fiscal policies and a strong financial system. Consumer expenditure is growing, backed by an expansion of the middle class.
  • Peru has benefitted from a strong export sector, based on commodity exports and the government’s prudent fiscal stance. It is also seeing a strong increase in middle class households which is having a beneficial impact on consumer expenditure, which we expect to increase by 5.3% in real terms in 2014. Economic growth has been slowing, having peaked in 2010, but growth will be given a boost by large copper mines coming on-stream in 2014 and 2015.

A Region Vulnerable to Both Chinese and US Slowdowns

Still reliant on commodity exports, Latin America is vulnerable to a slowdown in China and the USA in 2014 and beyond. The Brazilian economy has been spluttering but other significant economies in the region, including Mexico, Colombia and Peru are expected to see stronger growth this year. In common with other emerging market regions, much in 2014 depends on macro-economic fundamentals including current account positions and government finances. Those with strong fundamentals are much better placed to withstand external shocks.

Current Account Balances in Selected Latin American Countries: 2014

Source: Euromonitor International from national statistics/Eurostat/OECD/UN/IMF

Note: Data are forecast