According to BBVA Research’s Latin America Economic Outlook report for the second quarter of 2018, the region’s positive trends of recent years are set to continue, with GDP growth forecasted at 1.4% for 2018 and 2.5% for 2019. However, BBVA’s study service has downgraded its 2018 growth forecast for the region by three tenths.
“Latin American financial markets showcased their resilience in the face of mounting volatility in developed markets and political noise in some countries,” notes BBVA Research’s Latin America economic outlook report. In general, volatility remained low across the region’s markets as capital inflows continued. Financial asset resilience was underpinned by the region’s solid growth prospects and rising commodity prices.
Under this scenario, Latin America’s growth outlook remains upbeat. According to BBVA Research, the region’s GDP will grow by 1.4% in 2018 and 2.5% in 2019. This forecast for 2018 represents a downgrade of three tenths compared to its previous forecast from three months ago. The downwards revision affects Argentina and Uruguay, due to the drought; Paraguay, due to lower crop yields, and Peru, due to political noise.
The political factor has played against business confidence in countries such as Peru”
“The political factor has played against business confidence in countries such as Peru, where political turmoil and uncertainty climbed to high peaks during the first quarter of the year, offsetting the positive impact of copper prices,” notes the report, in reference to the political crisis leading to the resignation of Peruvian President Pedro Pablo Kuczynski.
“In the case of Mexico, private sector confidence remained stable ahead of the conclusion of NAFTA talks with the U.S.,” says the report. The region’s growth in the next two years will be driven by the foreign sector and investment activity.
Accommodative monetary policy
BBVA Research expects the region’s accommodative monetary policy to continue, as inflation remains within the central banks’ target ranges and economic activity below potential.
“The interest rate cut cycle will come to an end in South America in the second quarter,” says BBVA Research. “Argentina is the exception in South America, where interest rates are expected to decline once again as inflation keeps receding. In Mexico, interest rates will remain stable through to end 2018, when cuts are expected to start taking place, unless external and electoral risks materialize.
Among the main risks for this scenario, BBVA Research notes the surge in protectionism, the phasing out by the U.S. Federal Reserve of its stimulus policies –a risk that remains stable–, and the slowdown of the Chinese economy, a risk that’s more moderate today than a few months ago.
“Internally, political noise and a possible delay in public and private investments is a risk that is increasing in several countries, except Argentina and Chile,” says the report.
In the long term, BBVA Research analysts note the possibility of countries not focusing enough on the reform process they need to undertake to boost their productivity and, therefore, their growth potential.
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