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Economic analysis 20 Jul 2017

Latin America slowly returns to growth in 2017

Argentina and Brazil are finally pulling out of recession and driving the economic growth in Latin America as a whole this year, despite the slowdown in other countries in the region. According to BBVA Resarch’s ‘Latin America Economic Outlook’ Q3 report, the region will grow 0.8% in 2017 and 1.7% in 2018.

BBVA Research has downgraded its growth forecast for Latin America with respect to its second quarter report. The research unit now expects the region to post more moderate growth rates for 2017 and 2018, specifically 0.3 and 0.2 percentage points lower, respectively, than what it forecasted in April.

“This downward revision in 2017 has been especially influenced by the negative surprises in Chile’s and Colombia’s activity in recent quarters, as well as the impact of the decline in oil and commodity prices in the region’s exporting countries,” the report says. For 2018, besides external factors, BBVA Research also takes into account the delays in some infrastructure projects in Colombia and Peru.

The countries with higher growth in the next two years will be Argentina, Peru, Uruguay and Paraguay.”

 BBVA Research expects the region to grow at an aggregate rate of 0.8% in 2017 and 1.7% in 2018, compared to -1.2% in 2016. According to the report, “growth recovery in 2017 compared to last year will be supported by the performance of the region’s two largest economies (Brazil and Argentina), which will be pulling out of recession, while most of the region’s remaining economies will slow down in 2017, compared to 2016.”

This slowdown is mainly the result of external ‘shocks’ —for example, weak external demand— and anemic internal demand. “Latin America is recovering growth, but very slowly compared to its potential,” said Juan Ruiz, BBVA Research chief economist for Latin America. “The countries with higher growth in the next two years will be Argentina, Peru, Uruguay and Paraguay.”

 Low volatility in markets

In its report, BBVA Research underscores the low volatility levels that Latin American financial markets have experienced in recent months, thanks largely to a favorable global environment. Thus, risk premiums have adjusted downward and stock markets have posted gains. It should be noted, however, that Brazil’s performance was worse than expected due to the increase in political uncertainty resulting from the corruption charges brought against President Temer.

Inflation continues to decline

Inflation continued to decline in most of the countries in the region, thanks to weak internal demand, relative exchange rate stability, lower oil prices and more favorable dynamics in food prices.

In this context, several central banks in South America have announced interest rate cuts in recent months. “In most countries, the tone expected for monetary policy is now more accommodating than a few months ago,” says the report. Even in Mexico, which has hardened its economic policy in recent months, BBVA Research expects Banxico, the country’s central bank, to put an end to its interest rate hikes.

 Risks skewed downward

Risks linked to these forecasts are skewed downward. “On the internal side, we have the possibility of an increase in political noise and the risk of further delays in investment projects, including in infrastructure,” explains Juan Ruiz.  “On the external side, while the risks linked to US economic policies have diminished, the medium-term risks associated with the vulnerabilities of the Chinese economy have increased.”

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