Regional Private Consumption Update: No Major Upside This Year, 2015 Only Modestly Better

BMI View: We forecast real private consumption growth to remain subdued throughout 2014 in most of Latin America, as ongoing global rebalancing dynamics continue to drive currency and labour market weakness. While we expect household spending to improve modestly in most of the region in 2015, consumption growth will remain below historical averages. The only exceptions are Mexico and Colombia, where we forecast real private consumption to accelerate steadily in the next few years due to declining unemployment and more favourable exchange rates.

We expect real private consumption in most of Latin America's major economies to continue to face headwinds throughout 2014, stemming from the effects of ongoing global rebalancing on exchange rates and labour market dynamics. Indeed, weaker commodities prices, as Chinese demand for industrial metals continues to soften, will weigh on export growth, particularly in Chile, Peru, and Brazil, which will contribute to higher unemployment and hamper household income. Furthermore, strengthening economic data out of the US confirms our expectations that Federal Reserve will continue to trim its asset purchasing programme, which we expect to drive additional capital outflows from emerging markets, contributing to exchange rate weakness and eroding consumers' purchasing power. While we expect a modest rebound in private consumption growth in most regional economies in 2015, it will be due largely to base effects and a slower pace of exchange rate depreciation, and household spending growth will still remain below long-term averages. However, two exceptions to the overall lower trend in subdued private consumption growth that most of the region will experience are Mexico and Colombia, where strong trade and investment ties to the US, combined with strengthening domestic demand, will drive an acceleration in household spending growth over the next few years.

Brazilian Consumer Will Remain Erratic At Best

Consumer Will Remain Under Pressure In Most Of The Region
Latin America - Real Private Consumption Growth, %

BMI View: We forecast real private consumption growth to remain subdued throughout 2014 in most of Latin America, as ongoing global rebalancing dynamics continue to drive currency and labour market weakness. While we expect household spending to improve modestly in most of the region in 2015, consumption growth will remain below historical averages. The only exceptions are Mexico and Colombia, where we forecast real private consumption to accelerate steadily in the next few years due to declining unemployment and more favourable exchange rates.

We expect real private consumption in most of Latin America's major economies to continue to face headwinds throughout 2014, stemming from the effects of ongoing global rebalancing on exchange rates and labour market dynamics. Indeed, weaker commodities prices, as Chinese demand for industrial metals continues to soften, will weigh on export growth, particularly in Chile, Peru, and Brazil, which will contribute to higher unemployment and hamper household income. Furthermore, strengthening economic data out of the US confirms our expectations that Federal Reserve will continue to trim its asset purchasing programme, which we expect to drive additional capital outflows from emerging markets, contributing to exchange rate weakness and eroding consumers' purchasing power. While we expect a modest rebound in private consumption growth in most regional economies in 2015, it will be due largely to base effects and a slower pace of exchange rate depreciation, and household spending growth will still remain below long-term averages. However, two exceptions to the overall lower trend in subdued private consumption growth that most of the region will experience are Mexico and Colombia, where strong trade and investment ties to the US, combined with strengthening domestic demand, will drive an acceleration in household spending growth over the next few years.

Consumer Will Remain Under Pressure In Most Of The Region
Latin America - Real Private Consumption Growth, %

Brazilian Consumer Will Remain Erratic At Best

We forecast real private consumption growth in Brazil to slow from 2.3% in 2013 to 2.0% in 2014, and then pick up modestly to 2.4% in 2015 ( see 'Weaker Consumer To See Economic Recovery Falter', February 21). Despite the acceleration in consumption we expect to see next year, real private consumption growth will remain below its five-year average growth rate of 4.4%, and will be erratic on a quarter-to-quarter basis. Indeed, while we expect the real to remain in a depreciatory trend in the next couple of years, the unit will remain volatile, and bouts of currency strength, combined with base effects, could see periods of faster household spending growth. Moreover, supportive fiscal policies, such as tax cuts on consumer goods, especially in the run-up to the October general election, will also help support private consumption. However, consumer confidence remains weak, which will limit upside potential for household spending. Furthermore, the next government will likely have to moderate the current expansionary fiscal policies given a rising deficit and growing concerns from credit ratings agencies, which will temper household spending in the coming years.

Chilean And Peruvian Households To Continue To Face Headwinds From China

Among the major Latin American economies, we believe that Chilean and Peruvian households will be the most negatively affected by slowing Chinese demand growth for industrial metals, given the importance of copper exports to both economies. In Chile, we forecast real private consumption growth to slow from 5.5% in 2013 to 4.5% in 2014 and 4.4% in 2015, as weakness in the export sector contributes to higher unemployment, and a depreciating currency further constrains household spending. In Peru, we forecast real private consumption growth to come in at 5.2% in 2014, at the same pace as in 2013, but then to slow to 5.0% in 2015. Indeed, while exports have contracted since late 2011, investment has held up relatively well, which has supported employment in several sectors and prevented the slowdown in private consumption growth that Chile is already experiencing. However, in both cases real private consumption growth will remain below their respective five-year averages of 6.0% for Chile and 5.8% for Peru.

Latin America - Retail Sales Growth, % chg y-o-y
Latest Retail Sales Growth For Period: Same Period In Previous Year 2013 Average Growth
Argentina 35.2 Jan-14 24.2 26.4
Brazil 8.5 Feb-14 -0.2 4.2
Chile 5.3 Feb-14 7.2 9.8
Colombia 6.7 Feb-14 0.1 4
Mexico -0.3 Jan-14 1.8 -0.4
Venezuela 46.0 Sep-13 37.2 37.4
Note: Peru does not publish retail sales data. Source: Respective National Statistics Agencies, BMI

Potential For Additional Devaluations Pose Risks To Argentina And Venezuela Outlooks

In Argentina and Venezuela, both which have experienced large currency devaluations in recent months, the potential for additional exchange rate adjustments pose significant downside risks to our private consumption outlooks. In Venezuela, we forecast real private consumption growth to pick up from an estimated 0.5% in 2013 to 1.2% in 2014, mostly due to favourable base effects following the February 2013 devaluation of the bolívar. While we forecast real private consumption growth accelerate again in 2015, coming in at 2.0%, ongoing adjustment's to the different exchange rate mechanisms in the country, such as the newly introduced SICAD 2, could see household spending weaken sharply at any moment, and inflation, which is above 50.0%, remain elevated.

Currency Weakness Will Prevail In Most Latin American Economies
Latin America - Exchange Rate Performance Against The US Dollar, %

In Argentina's case, we forecast real private consumption growth to slow sharply from 4.5% in 2013 to 1.8% in 2014, driven by the January devaluation of the peso, which saw the unit depreciate by 17.7% in one week. While we forecast real private consumption growth to accelerate to 3.0% in 2015, in large part due to base effects, we do not rule out another currency devaluation given the economy's imbalances ( see 'High Likelihood Of Another Devaluation', January 27), which could result in another year of weak consumer spending.

Mexico And Colombia Stand Out Due To External Tailwinds And Positive Domestic Dynamics

Our two favourite consumer markets in the region from a long-term perspective are Mexico and Colombia. Indeed, both economies are mostly insulated from slowing Chinese metals demand and will benefit from an improving US economy, their main trade partner. As a result, we forecast a gradual multi-year appreciation for the currencies of both countries, and also anticipate lower unemployment rates in the coming years as economic activity picks up, which will ultimately support greater household spending.

Subdued Long-Term Outlooks Except For Mexico And Colombia
Latin America - Average Real Private Consumption Growth, %

In Mexico, we forecast real private consumption growth to accelerate from 2.5% in 2013 to 3.1% in 2014 and 3.7% in 2015. A key dynamic driving stronger real private consumption growth will be greater US demand for Mexico's manufactured goods, given that the sector generates about one in every four new jobs. In addition, financial sector reform, which was signed into law in January of this year, will also support higher household spending, as it will reduce interest rates on consumer loans by stimulating competition in the retail banking sector ( see 'Credit Growth To Accelerate But Informality To Limit Banking Sector Expansion', April 16).

In Colombia's case, we forecast real private consumption growth to accelerate from 4.5% in 2013 to 4.6% in 2014 and 4.8% in 2015. We believe that after almost two years of decelerating consumer credit growth, the expansion of consumer loans will pick up in the coming quarters, bolstered by historically low interest rates and record low unemployment rates ( see 'Consumer To Strengthen As Labour Dynamics Continue To Improve', February 19). In addition, significant growth in the number of credit card users, which has expanded by over 10.0% on average over the last five years, will also be supportive of stronger consumer spending in the coming years ( see 'Rapidly Expanding Sector Still Has Room To Go', September 17 2013).

Latin America - Real Private Consumption Growth, % chg y-o-y
2012 2013 Latest Period 2014f 2015f
Argentina 4.4 4.5 8.3 Q313 1.8 3.0
Brazil 3.2 2.3 2.0 Q413 2.0 2.4
Chile 6.1 5.5 4.9 Q413 4.5 4.4
Colombia 4.4 4.5 4.9 Q413 4.6 4.8
Mexico 4.7 2.5 1.5 Q413 3.1 3.7
Peru 6.1 5.2 5.0 Q413 5.2 5.0
Venezuela 7.0 0.5 4.2 Q313 1.2 2.0
Note: f = BMI Forecast. 2013 figures for Venezuela and Argentina are estimates as Q413 data was not yet released at the time of writing. Source: BMI, Respective National Statistics Agencies.

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This article is tagged to:
Sector: Country Risk
Geography: Latin America, Argentina, Brazil, Chile, Colombia, Mexico, Peru, Venezuela
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