Growth Downgrades Across The Board In The Midst Of Rebalancing

BMI View: Disappointing Q1 13 economic activity data has prompted us to make downward revisions to our real G DP growth forecasts for most of the major economies in Latin America . A main factor underpinning our growth downgrades is earlier than expected global rebalancing forces, which h ave weighed heavily on exports and will see restrained levels of household spending due to weaker currencies across the region. While we expect Latin America's growt h picture to improve modestly next year, it is becoming increasingly clear that among the region's heavyweights, Brazil and Mexico, the latter's outperformance is gaining traction.

While we have long- expected global headwinds to be one of the major drivers of slower growth in Latin America this year , mainly due to our view for a slowdown in Chinese demand in H213, global rebalancing forces have surfaced earlier than we had initially-antici pated, leading us to downgrade our growth outlook for several economies in the region . Furthermore, the rising prospects of normalisation of monetary policy in the US has seen a broad sell-off in the region's currencies, which will weigh on private con sumption over the coming months. As a result of the se dynamics , and combined with several country-specific factors , we have made downward revisions to our 2013 real GDP growth forecast for Brazil, Mexico , Colombia and Venezuela. This has seen our regional 2013 real GDP growth average fall from 3.6% to 3.2%, down from 4.0% in 2012. While we forecast a modest improvement in real GDP growth across the region in 2014, we believe that those economies, which are most trade integrated with the US , such as Mexico and Colombia, will stand to benefit the most from a solidifying economic recovery, while Argentina and Venezuela will remain underperformers.

Turning More Pessimistic
Latin America - Revised 2013 Real GDP Growth Forecasts, %

Mexico Gaining Traction Over Brazil

While our 2013 growth downgrades for both Mexico and Brazil were similar in size, the underpinning dynamics of our revisions re veal that our expectation for Mexico's growth story to become increasingly more attractive than Brazil's is gaining traction. In Mexico's case , the main factor behind our 2 0 1 3 downward growth revision, from 3.6% to 3.0%, is a weak perform ance of the manufacturing sector , as pent-up demand in the US unwinds, which saw exports and private consumption come in below our expectations in Q113. However, we expect a recovery in the manufacturing sector to gain momentum in H213 and into 2014, as US external demand improves. In Brazil's case, in which we revised this year's growth outlook to 2.6% from 3.3%, the underlying negative dynamics are far less temporary in nature than in Mexico. For instance, rising consumer price inflation, which has triggered a n aggressive hiking cycle by the Banco Central do Brasil in an environment of sluggish growth, and which we see continuing over the coming months, will restrain household spending throughout 2013 and into 2014. Moreover, Brazil's higher exposure to a Chinese growth slowdown through metal exports, will further see its performance vis-à-vis Mexico lose ground, both this year and next.

Modest Improvements In 2014
Latin America - Real GDP Growth Forecasts, %

Chile, Peru, And Colombia Will Remain Highly Exposed To Weaker External Demand

While in Chile and Peru we kept our below-consensus 2013 real GDP growth forecasts unchanged at 4.3% and 5.4% respectively, risks to our outlooks remain fir mly to the downside due to the countries' high exposure to slower Chinese demand for industrial metals. Indeed, in Chile's case , Q113 real GDP growth came in at 4.1% year-on-year (y-o-y) as exports contracted , implying that unless we see more favourable high frequency data over the coming months, a downward revision to growth is likely. Turning to Peru, real GDP growth in Q113 came in at 4.8% y-o-y, the country's slowest quarterly expansion seen since 2009, also driven by a contraction in exports, and as in Chile's case, the risks to our growth outlook lie firmly to the downside. In Colombia, which is not as di rectly exposed to a Chinese slowdown, but is vulnerable to lower oil prices associated with weaker external dynamics, we downgraded our 2013 growth outlook from 4.3% to 4.1%, as exports contracted in Q113. That said, similar to Mexico's case, we expect economic conditions in Colombia to begin to improve in H213 and throughout 2014 as it benefits from a closer integration with the US, but also due to improvements in oil production that will slightly mute the negative impact of weaker oil prices. However, as we expect in Peru 's and Chile 's case , a weaker currency will erode consumer purchasing power, result ing in lower level s of household spending than previously anticipated.

Real GDP Growth Forecasts, % chg
2013 2014
Source: BMI, Bloomberg (Consensus)
BMI Consensus BMI Consensus
China 7.5 7.8 6.7 7.7
US 2.1 1.9 2.7 2.7
Argentina 1.8 3.0 2.9 2.9
Brazil 2.6 3.0 3.0 3.4
Chile 4.3 4.7 4.6 4.7
Colombia 4.1 4.1 4.3 5.0
Mexico 3.0 3.2 3.9 4.0
Peru 5.4 6.1 5.0 6.3
Venezuela 1.0 1.0 2.1 2.5

Argentina And Venezuela Will Remain Major Laggards

We have long highlighted that Venezuela and Argentina will see a steep slowdown in growth in 2013, and Q113 growth data reaffirms our negative outlooks for both countries. Venezuelan Q113 real GDP data came in below our expectations at 0.7% y-o-y, prompting us to revise our 2013 forecast from 2.6% to 1.0%. The weak Q113 print was driven by a contraction in exports, and weak private consumption amid the recent devaluation of the bolívar, both dynamics which we expect to prevail throughout the year. In Argentina's case, where Q113 GDP data has not been released at the time of writing, weak monthly trade and consumer confidence data in the early stages of the year suggest that our below-consensus unchanged 2013 real GDP growth forecast of 1.8% remains on track. While we expect both economies to have hit bottom in 2013 and recover slightly in 2014, their growth stories will remain below the regional trend over the coming years, mainly due to their unfavourable business environments.

Latin America - Real GDP Growth, %
2011 2012 Latest Period 2013f 2014f
Note: f = BMI forecast; Source: BMI and respective national statistics agencies
Argentina 8.9 1.9 1.9 Q412 1.8 2.9
Brazil 2.7 .9 1.9 Q113 2.6 3.0
Chile 5.9 5.6 4.1 Q113 4.3 4.6
Colombia 6.6 4.0 4.6 Q412 4.1 4.3
Mexico 3.9 3.9 0.8 Q113 3.0 3.9
Peru 6.9 6.3 4.8 Q113 5.4 5.0
Venezuela 4.2 5.6 0.7 Q113 1.0 2.1

Relevant Economic Activity Research:

  • 'GDP Growth To Hit Bottom In 2013', June 14 (Argentina)

  • 'Risks Of Stagflation On The Rise', June 12 (Brazil)

  • 'Weaker Peso To Help Exports But Weigh On Consumption', June 12 (Colombia)

  • 'Sluggish Q113 Prompts Growth Downgrade', June 7 (Mexico)

  • 'Near-Recessionary Conditions To Prevail', June 4 (Venezuela)

  • 'Cracks In Growth Story Beginning To Show', May 30 (Peru)

  • 'Weakening Investment And Export Outlook To Hurt Growth', May 23 (Chile)

This article is tagged to:
Sector: Country Risk
Geography: Latin America

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