The growth of Latin America will remain modest in 2019 and the recovery is postponed to 2020
The BBVA Research Latin America Situation report for the second quarter of 2019 highlights the fact that the slowdown in global economic activity continues and uncertainty remains. Global growth has slowed due to China's structural moderation, the high uncertainty in Europe and the cyclical slowdown in the United States.
In this context, BBVA Research has revised downwards its forecasts for the Latin American economy, from 2.1% to 1.7% in 2019, and from 2.4% to 2.3% in 2020. This reduction is due to the greater difficulties in implementing the necessary adjustments in the region, and the worst activity data in recent months, mainly in Argentina, Brazil, and Mexico, in an environment of a slowdown in the global economy.
The review of growth prospects is concentrated in Brazil, Mexico, and Argentina, although there are also downward revisions in Uruguay and Paraguay. In Brazil and Mexico, where the capacity of policies to stimulate investment will be key, growth would be, between 2019 and 2020, between 1.5% and 2.0%. And in Argentina, after a contraction of 1.2% this year, the GDP would expand by 2.5% next year as a result of the recovery of domestic demand, which will join the dynamism of the external sector that we will see this year.
Meanwhile, Chile, Colombia, and Peru show greater resistance to the global slowdown, which is why BBVA Research maintains growth forecasts between 3% and 4% for this year and next.
BBVA Research's forecasts for raw materials, which are of crucial importance for many economies in the region, are also revised downwards, due to the global slowdown. The price of some of the most important raw materials for the region, such as oil and copper, will be reduced further, in line with the moderation of global demand, although the price of soy will probably recover.
"We maintain our previous oil forecasts, while we adjust slightly the projections for the price of copper (upwards) and soybean (downwards)".
Delay in interest rate hikes
In terms of monetary policy, the turn that the main central banks of the developed economies have made towards more expansionary policies generates a margin for the central banks of Latin America to delay the rise in interest rates; in a context, in addition, of inflation under control. In the same sense, in Mexico, the relaxation cycle of monetary policy will begin earlier than anticipated. The exception is Argentina, where monetary conditions will be tougher than previously expected, given the greater inflationary pressures.
Regarding currencies, the change in the global environment supports the vision of greater strength of the currencies of the region, after the correction experienced in 2018.
Risks for the region
At the global level, the risks for the region come from a global slowdown that is more sudden than expected and new protectionist measures in countries such as the US. UU and China, which would pose additional problems for the region. "Beyond global risks, the risks related to local political and fiscal issues remain relevant," says Juan Ruiz. The political environment will condition the macroeconomic environment, particularly in Argentina and Uruguay, where elections are held in the fourth quarter of 2019. In addition, the markets are still awaiting the actions of the new governments of Brazil and Mexico.
The increase in public debt worries in Brazil and Argentina, while in Mexico the financial situation of PEMEX is a growing risk. In Colombia, the focus is on compliance with the fiscal rule, while in Peru the greatest risk is eventual disruptions in copper production.
"Beyond global risks, risks related to local political and fiscal issues remain relevant"