Rising Commodity Prices,  Recovering Confidence Key Drivers of Latin America’s Growth

December 6, 2017//-Recovering confidence, accommodative financial conditions, rising commodities prices and a healthy global backdrop have driven Latin America’s economic performance in third quarter (Q3), as the economy puts last year’s recession firmly behind it.

This is according to the December 2017 edition of the FocusEconomics Consensus Forecast – LatinFocus.

Economic growth in Latin America sped up in the third quarter, as the long-awaited recovery takes hold. Preliminary data reveals that regional GDP expanded 1.7% annually in Q3, above Q2’s 1.1% rise and the strongest rate of growth since Q1 2014, it added.

Taking a closer look at the individual economies for which data is available, momentum firmed in major player Brazil, driven by strengthening household consumption and an improvement in investment.

FocusEconomics, a leading provider of economic analysis and forecasts for 127 countries in Africa, Asia, Europe and the Americas, noted in the report: Low inflation, near record-low interest rates and an improvement in confidence bolstered economic activity in the third quarter”.

Growth also gained steam in Chile, supported by a resilient labour market and higher export revenues. Similarly, higher commodities prices also boosted Colombia’s external sector in Q3, and GDP expanded at a quicker pace than in Q2, it reported.

In contrast, Mexico’s economy defied the regional trend and decelerated, as natural disasters weighed on its performance and high inflation eroded household spending.

Although GDP data is still outstanding for regional heavyweight Argentina, indicators for Q3 suggest that economic activity accelerated notably.

Meanwhile, Venezuela’s economy likely remained in free fall with little respite despite higher oil prices. Oil production dwindled in Q3 due to a lack of investment and mismanagement, and the gradual rise in oil prices is nowhere near enough to right the economy’s sinking ship.

OUTLOOK | Election cycle clouds policy outlook

The LatinFocus observed that  although the acceleration in growth is positive for the region, the pace of the recovery will be gradual considering last year’s performance, and economic slack persists.

Moreover, macroeconomic imbalances need to be addressed to put growth on a sustainable path. The region’s election cycle is, however, generating significant uncertainty regarding reforms and growth prospects, it warned.

“In the short term, upcoming elections in Brazil and Mexico are narrowing the window of time to enact badly-needed reforms, as politicians turn their attention to their campaigns. In late November, Mexico’s Finance Minister, José Antonio Meade, resigned to become the 2018 presidential candidate for the PRI party”.

Policymakers in Brazil are likely to begin distancing themselves from President Michel Temer, who is deeply unpopular.

In the medium-term, there is a risk that the upcoming votes will yield more divided parliaments, complicating policymaking, according to the LatinFocus.

“Chile’s November elections yielded a fractured congress, and the simultaneous presidential vote revealed a small margin of victory between the top two contenders”.

A second round of the presidential vote will take place on 17 December. On the other hand, new political figures in parliaments could be positive for the region’s outlook, if they manage to win strong mandates and usher in macroeconomic reforms.

In Argentina, President Mauricio Macri’s political capital has allowed him to pass several notable reforms. Most recently, he signed a landmark fiscal agreement with regional governors on 16 November, which should help correct the country’s macroeconomic imbalances.

This month, the LatinFocus Consensus Forecast for the region is unchanged and analysts see regional GDP growing 2.4% in 2018. A recovery of confidence in the region is expected to fuel healthy private consumption and investment next year, while exports of commodities are seen benefiting from higher global prices.

In 2019, growth is seen rising modestly to 2.7%. 6 of the 11 economies included in this report saw unchanged prospects this month, including Argentina, Colombia and Peru.

However, growth prospects were upgraded for Brazil, after a better-than-expected Q3 GDP reading, Ecuador and Paraguay.

Mexico and Venezuela were the only countries to see downgrades. Peru and Paraguay are expected to be the region’s fastestgrowing economies next year, with projected growth rates of 3.9%, followed closely by Bolivia.

At the other end of the spectrum, Venezuela is seen contracting 5.0% and Ecuador is seen growing a modest 1.4%.

African Eye Report 

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