Brazil leads the improvement in the Latin American Economic Climate in the 3rd Quarter

The Economic Climate Index (ECI) for Latin America increased in the third quarter of 2023 with positive contributions from the Present Situation Index (PSI) and the Expectations Index (EI). The results for Brazil lead the improvement, followed by Mexico.

The ECI for Latin America climbed from 65.8 points to 99.6 points between the 2nd and 3rd quarters of 2023 (Graph 1), an increase of 33.8 points between the two quarters.

The PSI gained 33.6 points over the period, reaching 85.7 points. The EI finished the 3rd quarter at 114.2 points, an increase of 33.9 points, and thus moved from the zone of adverse expectations to the favorable zone. The PSI remained in the adverse zone, although its quarter-on-quarter variation was greater than that of the EI. Therefore, the improvement in the ECI was led by the variation in the PSI.

improvement in the indicators is associated with the results of the two largest economies in the region - Brazil and Mexico (Table 1).

The ECI for Brazil moved from the adverse zone (58.8 points) to the favorable zone (121.4 points), recording a gain of 62.6 points between the 2nd and 3rd quarters of 2023. The 3rd quarter ECI is the highest since the 4th quarter of 2012 (125.3 points). The main contribution to the increase was provided by the component related to the PSI, which climbed 71.4 points between the 2nd quarter (28.6 points) and the 3rd quarter (100.0 points). It is the best result since the 2nd quarter of 2012 (116.1 points). The PSI moved from the adverse zone to the neutral zone while the EI left the adverse zone and recorded 144.4 points in the 3rd quarter, an increase of 51.5 points in relation to the previous quarter.

The trend of a decrease in the rate of inflation, approval of the Fiscal Framework and the Tax Reform, in addition to the revised GDP forecasts are among the factors explaining these results. The Survey was carried out prior to the cut in the basic rate of interest (SELIC) by the Central bank (Banco Central), which can be understood as another positive factor. It can be observed, however, that the Reforms are yet to be implemented and that the ECI may be impacted by the results obtained at the end of this process in the 4th quarter.

In Mexico, the variations between the 2nd and 3rd quarters were 33.0 points (ECI) 39.3 points (PSI), and 26.8 points (EI). All the variations were lower than those of Brazil; however, all the indicators moved from the adverse zone to the favorable zone. In the Economic Climate Index ranking for the 3rd quarter, Brazil occupied 2nd place and Mexico was 3rd. In the case of the PSI, Mexico was in second place and Brazil in third, while in the EI, Brazil was in 4th place and Mexico in 7th. Only in the evaluation of the present situation was the indicator for Brazil lower than that of Mexico.

In Mexico, as in Brazil, the fall in the price of commodities led to a drop in the rate of inflation, which occurred together with an increase in the value of the Mexican currency. In addition, shifts in the flow of direct investments of the United States and China to Mexico are indicated as a positive factor by various analysts.

As the largest economies in the region, Brazil, especially, and Mexico, explain the improvement in the indicators of the Latin American Survey. However, the general scenario is also one of improvement. Except for Uruguay, all the analyzed countries recorded an improvement in the ECI, with Paraguay, Uruguay, Brazil, and Mexico (Graph 3) all in the favorable zone. In the evaluation of the present situation, three countries worsened (Colombia, Peru, and Uruguay), one remained stationary (Ecuador), and six improved (Brazil, Mexico, Paraguay, Bolivia, Argentina, and Chile), with Mexico and Paraguay in the favorable zone (Graph 4). In relation to the EI, all the countries improved, and Paraguay, Uruguay, Peru, Chile, Brazil, and Mexico are in the favorable zone (Graph 5).

The improvement in the region’s indicators is reflected in the revised GDP forecasts for the region (Graph 6). Except for Peru, Uruguay, Chile, and Argentina, all the countries increased their GDP forecasts, with the largest variation being that of Brazil (+ 1.2 percentage points).