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Central banks Updated: 10 Nov 2016

BBVA Research: Latin America's economy will contract 0.9% in 2016 and gain momentum in 2017

Latin America’s economy, taken as a whole, is set to contract 0.9% in 2016, dragged by Brazil’s recession. According to BBVA Research’s Latin America Situation report corresponding to the first quarter of 2016, the region’s economy is expected to start gaining momentum in 2017, with a growth rate of 1.9%.

BBVA Research: Latin America economy will contract 0.9% in 2016, gain momentum in 2017

However, as BBVA Research notes in its report, on a per country basis, economic performance will be marked by disparity. While Brazil will delve deep into recession (-3% in 2016), Pacific Alliance nations (Chile, Colombia, Mexico and Peru) will grow at a combined 2.3% rate in 2016.

2016 and 2017 growth forecasts revised down

BBVA Research has revised down its growth forecasts for Latin America in 2016 and 2017, as a result of a combination of factors, including weak internal demand, a less favorable foreign environment, sharp drops in commodity prices and the growing concerns over China's economy. The study service has revised down the 2016 forecasts for all countries in the region except Peru, because the “el Niño” event has been less intense than what was originally expected. Peru (3.6%), Paraguay (2.7%) Mexico (2.2%) and Colombia (2,0%), and will be the most dynamic economies in 2016.

In 2017 we expect to see stronger growth in the region, 1.9%, on the back of a number of factors, such as the tailwind from the foreign sector thanks to higher global growth rates, the depreciation of the exchange rate and a gradual improvement of the terms of exchange” explains Juan Ruiz, Chief Economist of BBVA Research for South America. “Also, on the internal side, we expect lower political uncertainty in Brazil, a surge in private investment in Argentina and a boost in infrastructure investments in Peru and Colombia.”

High inflation and higher interest rates

BBVA Research expects inflation to remain high in the region, except in Mexico and Paraguay, due to the depreciation of both countries' currencies. According to Mr. Ruiz, “this, in combination with U.S. Federal Reserve's interestrate increase, will drive central banks to enforce tougher monetary policies in the countries of the region.”

On the positive side of the slowdown, weak internal demand and currency depreciations are helping to correct foreign deficits in most of these countries. However, the slowdown in internal demand is also translating into lower tax collections. “We’re seeing the worst fiscal deterioration in Brazil, due to both the recession and the political deadlock, which are preventing primary surplus targets from being met", explains Ruiz.