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Central banks 25 Jan 2018

BBVA Research: Latin America’s economic growth to speed up in 2018 and 2019

Economic activity in Latin America has been invigorated in recent months, in line with the recovery of confidence among families and businesses and a more favorable external context. In its Latin America Economic Outlook for first quarter 2018, BBVA Research forecasts that the region’s growth will increase from 1.1% in 2017 to 1.7% in 2018 and 2.5% in 2019.

“In Latin America, a change of trend is consolidating, after the slowdown that the region suffered during the five years up to 2016,” said Juan Ruiz, BBVA’s chief economist for South America. “The forecast for 2018 is 0.1 percentage points higher than three months ago, in line with our upward revisions of growth in many countries in the region, given the recent data on activity – which were better than expected – along with higher global growth and better prices for raw materials.”

In Latin America, a change of trend is consolidating, after the slowdown that the region suffered during the five years up to 2016″

 Upward revision in almost all the countries

BBVA Research has revised its growth forecasts upward in almost all the countries in the region, except for Colombia and Mexico, both of which remain unchanged at 2% in 2018. In Peru, the forecast for 2018 was cut by 0.4 of a percentage point of GDP  –  to 3.5% – due to the political tensions that began in mid-December and the negative impact they could have on private investment and on the execution of public sector investment.

Juan Ruiz, Head of BBVA Research for South America, describes in this video the economic projections for Latin America.

The Latin American economies have benefitted from a favorable global context. The world economy grew at about 3.7% in 2017, buoyed by the recovery of investment, the increase in demand and in world trade, and the positive performance of consumption. This scenario has favored the upturn in raw materials prices, which has had positive repercussions throughout the region.

Latin America has also been favored by the positive tone in the financial markets, marked by low volatility and the entry of capital flows, both of which have brought higher prices in the stock markets, declines in the risk premiums, and the appreciation (in real terms) of currencies in all the countries in the region.

“Mexico has not been an exception, although the renegotiation of the North American Free Trade Agreement (NAFTA) may have caused tensions in the country’s financial markets,” says the BBVA Research report.

Inflationary pressures remain under control

Inflation has remained at relatively low levels during 2017 in most of the region, due in part to the weakness in internal demand, the relative appreciation of the currencies and in many cases, the more favorable evolution of food prices.

In Argentina, inflation declined significantly in 2017 but has remained at levels near 25%, far above the reference range of 12% to 17%.

Mexico has been an exception, with significant increases in inflation, up to 6.8%, owing principally to the price adjustments in gas and the weakness of the peso.

Brazil, Chile and Perú the margin that monetary authorities have to announce new cuts in the benchmark interest rates will be reduced”

Many countries find themselves with low inflation rates, close to the objectives of their central banks. “To the extent that, starting from low levels, inflation will move upward in the coming months in Brazil and Chile, and starting in the second quarter in Peru, in those countries the margin that monetary authorities have to announce new cuts in the benchmark interest rates will be reduced,” the report says.

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Latin America will achieve growth rates close to its potential, of 2.5% to 3%, between 2019 and 2020

In Colombia, BBVA Research observes that there is room for interest rate cuts in the months to come – following the two reductions at the end of 2017 – due to the expected reduction in inflationary pressures.

In Mexico, due to the price increases, BBVA Research does not rule out a possible increase in interest rates at the upcoming meeting in February, although it would be the last in the current cycle.

Growth potential is lower than in 2013

As Juan Ruiz explained, Latin America will achieve growth rates close to its potential, of 2.5% to 3%, between 2019 and 2020. “This potential growth is significantly lower than that which was achieved during the decade of steep increases in raw material prices, up to 2013,” he said. “With this lower growth potential, it´s going to be more difficult to resume the process of reducing the gap with the developed economies in per capita income. This underscores the importance of driving structural reforms, in order to increase productivity growth and in this way, per capita income growth.”

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