The economic slowdown in Latin America will come to an end this year, with a 1.1% growth rate in the region. Forecasts by BBVA Research estimate that in 2018, the region´s economy will continue to recover, with GDP expanding at the rate of 1.8%. This is still well below its potential, which is estimated at close to 3%.
The improvement in the Latin American economy will be due to the boost from the external sector, given the greater global growth, and to an improvement in the terms of trade. It will also be positively influenced by investment, particularly in Argentina and Colombia.
“The recent data show that there’s a recovery already underway in Argentina and that the recession has come to an end in Brazil. Meanwhile, in Mexico the economic outlook is less unfavorable, to the extent that the United States adopts trade policies that are less aggressive than had been expected,” said Juan Ruiz, BBVA’s chief economist for South America, at the presentation of the report, Situación América Latina Segundo Trimestre 2017 (Latin America Economic Outlook. Second Quarter 2017).
The economist added that a review is underway of the growth estimates for Colombia and Peru, due to the weak data from these two economies during the opening months of the year, and the delay in infrastructure projects. Added to this, in Peru´s case, is the effect of the so-called coastal Niño.
Moderate inflation and further interest rate cuts
According to BBVA Research, inflation in the South American countries has been slowing thanks to the strength of the exchange rates and weak demand; the forecast is for this process to continue throughout the current year. In this regard, further interest rate cuts are expected in the countries where they have been taking place and they are expected to given in Argentina and Peru, given an expected moderation of prices in those two countries.
In Mexico, on the other hand, prices will continue to rise, due to the lagging effect of currency depreciation and the increase in fuel prices. However, looking forward, a moderation in prices is expected. “This means that the cycle of monetary tightening in Mexico will be less intense than was expected three months ago and it´s probable that the Mexican central bank will adjust its funding rate during the rest of the year, in line with what the Federal Reserve will do,” Juan Ruiz explained.
As for exchange rates, limited depreciations are expected going forward, in the midst of monetary easing in South America, which contrasts with the increase in interest rates by the Federal Reserve. In Mexico, meanwhile, it is expected that the process of appreciation of the peso in the short term will continue.
The Latin America Economic Outlook report points out that the adjustment of public sector deficits continues (with the exception of Peru, due to the natural disasters there) while the primary deficit objective has still not been met in Brazil and Argentina. All this is taking place in the midst of a recovery in the region’s financial markets.