Heavyweights pull LatAm growth down
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Emerging Markets

Heavyweights pull LatAm growth down

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Economic growth has slowed to a crawl in both Brazil and Mexico but the two countries have taken different paths

Sluggish growth in Brazil and Mexico, which account for almost two thirds of Latin America’s GDP, will drag the regional performance down, amid a more widespread emerging markets slowdown, according to new forecasts.

Both the International Monetary Fund and the International Institute of Finance (IIF) have forecast regional GDP to grow by a mere 2.7% this year and around 3% next year.

The IIF predicts that the current negative mood among investors will extend at least until Brazil’s presidential election in a year’s time. Economic growth of 2.5% this year would be followed by a meagre 2% increase in GDP next year, according to Ramon Aracena, the IIF’s chief Latin America economist.

“Brazil should be growing 4% minimum,” he told Emerging Markets. But its economic policy choices have not helped its growth. “We have been warning about this problem for the past two or three years.

“Brazil was in a very strong position to go to the second stage of structural reforms and withdraw the stimulus after the global financial crisis, but this did not happen. There was an excessive focus on growth without paying attention to what would be the impact on long term inflation,” Aracena said. The consumer price index posted a 5.9% annual increase in September.

The IMF has cut its 2014 growth forecast for the largest Latin American economy for the second time this year to 2.5%, which is less than half of the emerging market average (5.1%, revised down from 5.5%). At the beginning of the year, the IMF issued a 4% growth forecast for Brazil. The 2014 forecast was cut to 3.2% in July. While being critical of Brazil’s fiscal stance, the IMF has praised “determination to stick to the monetary policy framework”, according to Thomas Helbling, chief of the IMF’s world economic outlook division. “It has not been exactly smooth sailing, but the ingredients to move on and keep the economy as stable as it can [be] are here,” he said.

Brazil is expected to pursue a monetary tightening cycle until the end of the year. “Monetary tightening will have to remain in place for longer than expected in order to rein in inflation. We also expect confidence to recover in a very slow fashion,” says Aracena.

Meanwhile, Mexico is expected to show a dismal performance this year of just above 1% GDP growth but to bounce back to a 3% expansion in 2014, according to the IMF, or even 4%, according to the IIF.

“They are putting countercyclical stimulus to the economy, they are asking the Congress to be able to run a larger budget deficit, and monetary policy has been easing and moving in a different direction than Brazil’s,” said Aracena.

The central bank of Mexico has cut its benchmark interest rate twice this year to 3.75%. “Our expectation is that they are going to reduce interest rates even more. There is still scope for at least another 25 basis points in the policy rate this year,” Aracena said.

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