Firming recovery in Brazil as the consumer returns; political risk and NAFTA uncertainty weighs on regional economic outcomes


Boas Vibrações? (“Good Vibes”)

Latin Americans can breathe a sigh of relief - at least for now. After two years of recession, in 2015 (-0.2%) and 2016 (-1.2%) we estimate 2017 GDP growth at +1.4% and expect it to accelerate to +2.4% in 2018.

The buds of recovery have started to blossom with higher commodity prices (the S&P GSCI index was up 13% in 2017) and the Brazilian return to growth with +1.1% in 2017 and +2.5% in 2018 (forecast). These should further fuel the regional acceleration.

South American countries’ growth rates are converging again. Moreover, the improved macroeconomic environment has seen a less steep rise in the number of business insolvencies in 2017 with +17%, after +47% in 2016. The number of failures should stabilize in 2018 (+0%) for the first time in six years. Yet the busy political calendar could prevent the region from thriving at its pre-recession average growth rate (+3.5% from 2005 to 2014).

Buckle up! For a (modest) acceleration

We estimate the three major economies - Brazil, Mexico and Argentina - will contribute to 70% of the region’s growth in 2018. Export gains over four quarters reached USD +29.4bn in Mexico in Q3 2017 and USD +24.5bn in Brazil.

The recovery should now shift to the consumer. Retail sales have shown dynamism especially in Brazil where they posted their highest y/y growth in November since February 2014 (+5.1%). Besides, Euler Hermes upgraded two Brazilian consumer-related sectors in Q4 2017: Automotive and Agrifood. This bodes well for internal demand.

The upswing will be supported by (i) the trend reversal in unemployment in Brazil (12% in November 2017 down from 13.7% in March); (ii) accommodative monetary policies (post-disinflation in 2015-16), although the easing trend will likely slow down.  Inflation is expected to ease to +5.7% in 2018 on average in Brazil, Mexico, Argentina, Chile, Colombia and Peru, after +7.4% in 2017. For the first time in four years, financial conditions are improving.  

Country risk and economic growth forecasts (%) in Latin America