South America will recover in 2017 after four years of slowdown

BBVA Research Latin America Situation Report

“This year, 2017, we see a certain divergence between the performance of South America, on the one hand, and Mexico, on the other,” explains Juan Ruiz, chief economist at BBVA Research for South America.

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El GDP of South America will recover in 2017 after four years of slowdown, while Mexico will be fully impacted by the shock of uncertainty about the policies of United States, which will be a drag on its growth.

 

These are the main conclusions of the report BBVA Research Latin America Situation, corresponding to the first quarter of 2017

 

“This year 2017 we see a certain divergence between the performance of South America, on the one hand, and Mexico, on the other hand,” he explains Juan Ruiz, chief economist BBVA Research for South America. “In both cases we anticipate a growth of 1% in 2017, but in the case of South America This will represent a turning point, after four years of slowdown, between 2013 and 2016, and after activity fell last year.”

 

On the contrary, he explains Juan RuizIn the case of Mexico, a growth of 1% in 2017 represents a slowdown, as it has fully received the impact of uncertainty about the economic policies that will be implemented in United States with the arrival of the new administration to the Casa Blanca.

 

Global environment: more growth and inflation

 

These forecasts are made in a global context that improved in the final months of 2016 and continues to do so in 2017. BBVA Research estimates that global growth will increase slightly in 2017, to 3,2%, thanks to improved confidence in all major economies, industrial sector indicators and an incipient improvement in the world trade.

 

 However, despite this acceleration, BBVA Research The report points out that 2017 and 2018 are years plagued by uncertainties; the main one is associated with the economic policy of the new US administration, and especially the protectionist measures being discussed, which could seriously damage the economy. international trade.

 

“The magnitude of inflationary pressures is another unknown that is emerging globally,” the report notes. The rebound in raw materials, the size of the balance sheets accumulated by central banks In developed countries, and the prospects for fiscal stimulus are three factors that have dissipated the deflationary risks of a few quarters ago, giving way to inflationary pressures.

 

These risks translated into volatility in the financial markets Latin AmericansFrom the beginning of November to mid-December, Latin American financial assets, and particularly Mexican ones, registered losses due to the increase in uncertainty about economic policy in USA after the presidential elections on November 8 and, to a lesser extent, by the Fed's interest rate hike on December 14. However, after the initial shock, the region's markets, with the exception of Mexico, regained their composure and reabsorbed the losses suffered at the beginning of November.

 

 

These forecasts are made in a global context that improved in the last months of 2016 and continues to do so in 2017.

 

 

 

Mexico: The Impact of Uncertainty on U.S. Policies

 

Confidence indicators in Mexico suffered a sharp decline in December and January, due to uncertainty surrounding the economic policies of the new US administration.

 

Business confidence has declined as a result of a series of measures that could negatively impact the Mexican economy. This is the case of the possible renegotiation of the free trade agreement with Mexico and Canada (NAFTA), possible restrictions on migration and remittance flows or tax reform plans that could tax imports.

 

In the case of families, the rise in gasoline prices and the upward impact on inflation also had an impact.

 

BBVA Research predicts that Mexico will grow by 1% in 2017 and 1,8% in 2018, compared to 2% in 2016. “Uncertainty about economic policies in USA will affect investment, while the depreciation of the exchange rate and the consequent increase in inflation will force a more restrictive monetary policy, with a negative impact on growth," argues the research service of BBVA.

 

 South America, change of trend

 

En South AmericaConfidence indicators have not been affected in most countries following the initial announcements of the new US administration, and financial markets have regained their composure. This trend should be reflected in economic activity, which will translate into growth of 1% in 2017 and 1,7% in 2018. "This breaks the trend of slowing growth seen over the last four years, between 2013 and 2016," notes Juan Ruiz.

 

The growth of the region will come from the improvement of the foreign sector, thanks to the recovery of raw material prices and the depreciation of currencies in the last two years, as well as the boost in public and private investment in countries such as Argentina, Colombia and PeruThe greatest dynamism in 2017 will be Peru (+ 3,5%),  Paraguay (+ 2,9%), Argentina (+2,8%) and Colombia (+2,4%), and to a lesser extent Chile (+1,6%) and Uruguay (+ 1,3%). Brazil, the region's largest economy, is making progress in recovering growth thanks to the approval of tax reform and lower interest rates. BBVA Research estimates growth of 0,9% for the country in 2017 and 1,2% in 2018.

 

 Interest rate cuts in South America

 

BBVA Research estimates that inflation in countries South America will continue to decline and converge towards central bank targets, facilitating cuts in official interest rates. MexicoHowever, inflation has risen significantly over the past seven months, reaching 4,6% in January, above the central bank's tolerance range for the first time since 2014. According to the report, inflation could reach 6% in 2017, affected by the depreciation of the exchange rate, which will incline the Central Bank of Mexico to decree further rate hikes.

 

Internal and external risks

 

The report concludes with a discussion of the risks to growth in the region and divides them into two types: internal and external. On the internal side, BBVA Research highlights the risks related to political noise in many countries, which is magnified by a very dense electoral cycle in the region, with important elections in 2017 or 2018 in almost all countries. Likewise, the delay in key infrastructure projects in some countries may not only directly weaken domestic demand but also business confidence. On the external front, the risks center on the uncertainty about the economic policies that the new administration will ultimately implement. U.S. (especially, but not exclusively, the risk of increased protectionism), as well as in the process of reducing macroeconomic imbalances in China, which could sharply affect growth in that country.