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Latam Economic Outlook: Third Quarter 2014
Latam Economic Outlook: Third Quarter 2014
Latam Economic Outlook: Third Quarter 2014
Latam Economic Outlook: Third Quarter 2014
Latam Economic Outlook: Third Quarter 2014
Latam Economic Outlook: Third Quarter 2014
Latam Economic Outlook: Third Quarter 2014
Latam Economic Outlook: Third Quarter 2014
Latam Economic Outlook: Third Quarter 2014
Latam Economic Outlook: Third Quarter 2014
Latam Economic Outlook: Third Quarter 2014
Latam Economic Outlook: Third Quarter 2014
Latam Economic Outlook: Third Quarter 2014
Latam Economic Outlook: Third Quarter 2014
Latam Economic Outlook: Third Quarter 2014
Latam Economic Outlook: Third Quarter 2014
Latam Economic Outlook: Third Quarter 2014
Latam Economic Outlook: Third Quarter 2014
Latam Economic Outlook: Third Quarter 2014
Latam Economic Outlook: Third Quarter 2014
Latam Economic Outlook: Third Quarter 2014
Latam Economic Outlook: Third Quarter 2014
Latam Economic Outlook: Third Quarter 2014
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Latam Economic Outlook: Third Quarter 2014

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LatAm will grow 1.6% in 2014 and 2.5% in 2015, similar to 2013. The sharp downturn in regional growth in the first half of this year is behind us. The Pacific Alliance will grow by 3.1% and 4.0% in …

LatAm will grow 1.6% in 2014 and 2.5% in 2015, similar to 2013. The sharp downturn in regional growth in the first half of this year is behind us. The Pacific Alliance will grow by 3.1% and 4.0% in 2014-15, well above the regional average.

Slowdown reduces pressure on external deficits, but increases the pressure on fiscal accounts.
Weak growth has tended to bias the region’s monetary policies towards a more accommodative tone, even in economies where high inflation leaves doubts about the space for further monetary stimulus.

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  • 1. Latin America: a soft patch in 2014 Juan Ruiz BBVA Research │ Chief Economist for South America Latin America Outlook – 3Q14 │ Madrid, 6 August 2014
  • 2. Latin America Outlook / August 2014 Page 2 The global cycle remains robust, despite the soft patch in the first quarter. Global growth will rise from 3.0% in 2013, to 3.3% in 2014 and 3.8% in 2015. Low volatility in international financial markets has spread to LatAm, even with the sharp slowdown in activity, but runs the risk of going into reverse if there is significant volatility after the Fed raises interest rates. LatAm will grow 1.6% in 2014 and 2.5% in 2015, similar to 2013. The sharp downturn in regional growth in the first half of this year is behind us. The Pacific Alliance will grow by 3.1% and 4.0% in 2014-15, well above the regional average. Slowdown reduces pressure on external deficits, but increases the pressure on fiscal accounts. Weak growth has tended to bias the region’s monetary policies towards a more accommodative tone, even in economies where high inflation leaves doubts about the space for further monetary stimulus. Key messages 1 2 3 4 5
  • 3. Latin America Outlook / August 2014 Page 3 1 Global economy: recovery will continue, after the setback in the first quarter 2 LatAm: sharp slowdown in the first half of 2014 is behind us Overview
  • 4. Latin America Outlook / August 2014 Page 4 Global cycle: global growth will increase after the temporary setback in 1H14 Global GDP growth (% QoQ) Source: BBVA Research Growth continues to be solid and will improve after the setback in 1H14 Lower growth in 1Q14 was largely due to the negative weather shock in the US 0.00.20.40.60.81.0 MC Apr-14ActualMC Apr-14Current EstMC Apr-14Current Est 3Q134Q131Q142Q143Q14CurrentForecast
  • 5. Latin America Outlook / August 2014 Page 5 Tensions have eased in financial markets since the beginning of the year BBVA financial stress index, developed and emerging markets Source: BBVA Research Low volatility in international financial markets continues … The recent upturn in emerging market stress index is specifically linked to Russia, an idiosyncratic event which has not spread to other emerging economies … in both developed and emerging economies -0.10-0.08-0.06-0.04-0.020.000.020.040.06-0.7-0.4-0.10.20.50.81.11.41.7 May-12Oct-12Mar-13Aug-13Jan-14Jun-14 DevelopedEmerging (rhs)
  • 6. Latin America Outlook / August 2014 Page 6 We stick to our central scenario for China: growth of over 7% China: GDP growth (%) Source: BBVA Research The gradual rebalancing of expenditure, from consumption to investment, will continue Softening of monetary policy, with lower reserve requirements, while interest rates will remain unchanged The government will continue taking measures to support growth, but is not succeeding in breaking the dependence on loans 7.77.77.27.04.04.55.05.56.06.57.07.58.02012201320142015Baseline Jul-2014Baseline Apr-2014
  • 7. Latin America Outlook / August 2014 Page 7 US: growth surged in 2Q14. The Fed will match improvements in growth by raising interest rates US: Fed funds (%) Source: BBVA Research After a poor first quarter, growth recovers in the second The Fed’s communication policy about its withdrawal strategy will be increasingly influential The Fed will stop expanding its balance sheet in October 2014 and interest rate hikes could start in September 2015; rates will be dependent on improvements in the labour market 0,00,51,01,52,02,5 Sep-13May-14Jan-15Sep-15May-16Jan-17 BBVA forecastFed FundsImplicit policy rates in fed funds futures
  • 8. Latin America Outlook / August 2014 Page 8 Eurozone: ECB measures bias upwards both growth and inflation Eurozone: GDP growth (%) Source: BBVA Research Economic recovery will be based on (i) positive policy combinations; (ii) progress on banking union; (iii) improvement in the external environment The ECB’s measures (TLTROs, LTROs, negative deposit rates, non-sterilisation, QE?) strengthening interest-rate guidelines and the monetary policy transmission mechanisms -0.6-0.41.11.9-1.0-0.50.00.51.01.52.02.52012201320142015Baseline Jul-2014Baseline Apr-2014
  • 9. Latin America Outlook / August 2014 Page 9 Oil prices will stay high because of geopolitical risks. Soy bean and copper trending downwards Brent Crude: (USD/barrel) Source: BBVA Research and Bloomberg Soy bean: (USD/mt) Source: BBVA Research and Bloomberg Copper: (USD/lb) Source: BBVA Research and Bloomberg Adjustment in the oil price scenario as a reflection of greater geopolitical risks Soy bean and copper prices will continue to fall back down to their long-term values, very similar to our estimates three months ago 70809010011012020102011201220132014201520162017May 2014August 201430035040045050055060065020102011201220132014201520162017May 2014August 20142.02.53.03.54.04.520102011201220132014201520162017May 2014August 2014
  • 10. Latin America Outlook / August 2014 Page 10 In short, increasing global growth in 2014 and 2015 World growth forecasts (%) Source: BBVA Research Global growth will continue, with improvements in developed markets, the US and the eurozone, with a mild deceleration expected for China The risk of a sharp slowdown in China is low and the Fed is keeping financial volatility well anchored, but geopolitical risks are cropping up all over the place EAGLEs is the emerging markets group which will contribute most to world GDP in the next 10 years. The group consists of China, India, Indonesia, Brazil, Russia, Turkey and Mexico. 3.03.33.81.92.02.5-0.41.11.95.35.15.4-2-10123456131415131415131415131415WorldUSEurozoneEagles* Forecasts in Aug 2014Forecasts in May 2014
  • 11. Latin America Outlook / August 2014 Page 11 1 Global economy: recovery will continue, after the setback in the first quarter 2 LatAm: sharp slowdown in the first half of 2014 is behind us Overview
  • 12. Latin America Outlook / August 2014 Page 12 The widespread recovery in asset prices in LatAm (bonds, stock exchanges) continues But the risk of an adjustment in asset prices in LatAm does exist, should the Fed’s interest rate hikes generate too much volatility Capital flows to LatAm recover, buoyed by moderation in international financial tensions and abundant liquidity Calm in the international financial markets also reached LatAm Sovereign spread in emerging economies (%) Source: BBVA Research and Haver Analytics 80100120140160180200220Jan-13Apr-13Jul-13Oct-13Jan-14Apr-14Jul-14Emerging AsiaEmerging EuropeLatamBernankespeechStart oftapering
  • 13. Latin America Outlook / August 2014 Page 13 Latin America will grow 1.6% in 2014 and 2.5% in 2015, similar rates to those of 2013 Activity figures surprised to the downside in the first half of 2014, except in Colombia Severe moderation of private-sector investment in the region (BRA, CHI, MEX) and in the public sector (CHI, PER) LatAm*: GDP growth (%YoY) Source: BBVA Research * Weighted average of Argentina, Brazil, Chile, Colombia, Mexico, Paraguay, Peru, Uruguay and Venezuela Increasing differentiation: Pacific Alliance countries will grow by 3.1% in 2014 and 4% in 2015, well above the regional average Growth will rise from a low base from 3Q onwards, due to higher global growth and increased public investment 6.14.12.62.51.62.50123456720102011201220132014e2015eLatamMercosurPacific Alliance
  • 14. Latin America Outlook / August 2014 Page 14 Growth will continue to be very heterogeneous, with the 3 Andean countries and Paraguay standing out Downward adjustments in most countries, apart from Colombia Significant increase in growth in 2015, compared to 2014, in Peru, Mexico and Chile. Momentum will continue in Colombia LatAm countries: GDP growth (%) Source: BBVA Research Brazil’s growth will remain very moderate 14.4-20246810 201320142015201320142015201320142015201320142015201320142015201320142015201320142015201320142015201320142015201320142015201320142015 ARGBRACHICOLMEXPARPERURULatamMCS*PA** Forecasts in August 2014Forecasts in May 2014
  • 15. Latin America Outlook / August 2014 Page 15 Box 1: Slight downward revision of potential growth rate in LatAm Potential growth in Latin America is slightly above 3%, although with strong heterogeneity by country. Downward revision because of ARG, BRA and CHI Strong contribution of total factor productivity (TFP) in Colombia, Mexico and Peru LatAm: Potential GDP growth (% YoY avg.) Source: BBVA Research Increased TFP in Mexico and Colombia, thanks to reforms. Total effect could be even greater -10123456 2011-152016-202011-152016-202011-152016-202011-152016-202011-152016-202011-152016-202011-152016-20 ARGBRACHICOLMEXPERLatamCapitalLabourTFPPotential growth
  • 16. Latin America Outlook / August 2014 Page 16 Economic deceleration reduces the pressure on external accounts … External deficits will start to fall from 2014 and 2015, due to weak internal demand and rising global growth … LatAm: Current account deficit (% GDP) Source: BBVA Research and Haver Analytics … and weaker exchange rates, which will partly offset the lower terms of trade … the end of a series of supply shocks in the export sector (Peru, Colombia, Chile, Argentina)… -7-6-5-4-3-2-1012 201320142015201320142015201320142015201320142015201320142015201320142015201320142015201320142015201320142015 ARGBRACHICOLMEXPARPERURULatamForecasts in August 2014Forecasts in May 2014
  • 17. Latin America Outlook / August 2014 Page 17 … but raises it on fiscal accounts The slowdown in demand and lower commodity prices will put downward pressure on tax revenues LatAm: Fiscal deficits (% GDP) Source: BBVA Research and Haver Analytics We also expect greater fiscal impulse in the Pacific Alliance countries and a higher financial burden of debt in Brazil and Argentina In Mexico and Chile this will be offset by the effects of the income tax reforms -5-4-3-2-101 201320142015201320142015201320142015201320142015201320142015201320142015201320142015201320142015201320142015 ARGBRACHICOLMEXPARPERURULatamForecasts in August 2014Forecasts in May 2014
  • 18. Latin America Outlook / August 2014 Page 18 Upward pressures on inflation start to slacken Inflation driven by shocks to food prices and exchange-rate depreciation Inflation will stay in the upper reaches of central banks’ target bands, except in Chile. Little scope for relaxing monetary policy LatAm: inflation (% YoY) in countries with inflation targets Source: BBVA Research and Haver Analytics 0246810 Jun-13Dec-13Jun-14Dec-14Jun-15Dec-15Jun-13Dec-13Jun-14Dec-14Jun-15Dec-15Jun-13Dec-13Jun-14Dec-14Jun-15Dec-15Jun-13Dec-13Jun-14Dec-14Jun-15Dec-15Jun-13Dec-13Jun-14Dec-14Jun-15Dec-15Jun-13Dec-13Jun-14Dec-14Jun-15Dec-15 BrazilChileColombiaMexicoPeruUruguayForecasts
  • 19. Latin America Outlook / August 2014 Page 19 Weak growth has tended to bias monetary policies towards a more relaxed tone Inflation rates in the upper part of the target band (and hefty foreign deficits in Peru and Uruguay) appear to leave little scope for interest rate cuts We have noticed a certain trend in supporting growth with the cuts in Chile (anticipated) and in Peru and Mexico (unexpected) We expect further cuts in Chile and Peru, while Colombia continues to raise interest rates hand in hand with the improvement in the cycle Increasing use of macroprudential measures, such as cuts in reserve ratios Official interest rate in countries with inflation targets (%) Source: BBVA Research and Haver Analytics 02468101214 Jan-10Jun-10Nov-10Apr-11Sep-11Feb-12Jul-12Dec-12May-13Oct-13Mar-14Aug-14Jan-15Jun-15Nov-15 BRACHICOLMEXPARPER
  • 20. Latin America Outlook / August 2014 Page 20 Exchange rates will depreciate in 2014 and 2015, with very heterogeneous intensities Variation in the exchange rate against the dollar in countries with inflation targets (%) Source: BBVA Research and Haver Analytics Trend towards the depreciation of the exchange rate, because of a lower relative growth, lower commodity prices and increased exchange rates by the Fed in 2015 More depreciation in countries with higher inflationary pressures (BRA, URU, ARG)… … and in those countries showing signs of an overvalued currency (Brazil) -8-6-4-2024681012BRACHICOLMEXPARPERURUJanuary-July 2014July-December 20142015
  • 21. Latin America Outlook / August 2014 Page 21 The global cycle remains robust, despite the soft patch in the first quarter. Global growth will rise from 3.0% in 2013, to 3.3% in 2014 and 3.8% in 2015. Low volatility in international financial markets has spread to LatAm, even with the sharp slowdown in activity, but runs the risk of going into reverse if there is significant volatility after the Fed raises interest rates. LatAm will grow 1.6% in 2014 and 2.5% in 2015, similar to 2013. The sharp downturn in regional growth in the first half of this year is behind us. The Pacific Alliance will grow by 3.1% and 4.0% in 2014-15, well above the regional average. Slowdown reduces pressure on external deficits, but increases the pressure on fiscal accounts. Weak growth has tended to bias the region’s monetary policies towards a more accommodative tone, even in economies where high inflation leaves doubts about the space for further monetary stimulus. Key messages 1 2 3 4 5
  • 22. Latin America: a soft patch in 2014 Juan Ruiz BBVA Research │ Chief Economist for South America Latin America Outlook – 3Q14 │ Madrid, 6 August 2014
  • 23. Latin America Outlook / August 2014 Page 23 Appendix: Growth forecasts in Latin America Source: BBVA Research. *Forecasts2011201220132014*2015* Argentina8.60.92.9-1.00.2Brazil2.71.02.51.31.6Chile5.85.44.12.93.8Colombia6.64.04.74.94.8Mexico3.93.81.12.53.5Paraguay4.3-1.214.44.94.3Peru6.56.05.84.15.9Uruguay7.33.74.42.72.9Mercosur3.51.32.40.41.2Pacific Alliance4.84.22.53.14.0Latin America4.12.62.51.62.5GDP growth (% YoY)

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