The Economic Climate for Latin America improves in the first quarter, but Brazil moves in the opposite direction.

The Economic Climate Index (ECI) for Latin America rises between the 4th quarter of 2022 and the 1st quarter of 2023, with improvements in six of the 10 main countries surveyed. Brazil moves in the opposite direction with an additional fall in the ECI driven by the indicator for the Present Situation.

The Economic Climate Index (ECI) for Latin America climbed 6.9 points between the 4th quarter of 2022 and the 1st quarter of 2023. Although it remains low in historical terms, the indicator reaches 73.4 points, the highest level since the 4th quarter of 2021. As shown in Graph 1, the ECI has remained in the adverse zone of the economic cycle since the 3rd quarter of 2013, with some exceptions - the 4th quarter of 2017, the 1st quarter of 2018, and the 3rd quarter of 2021. It can be observed, however, that in all these quarters, the index remained close to the neutral level of 100 points.

The two indicators that make up the ECI improved this quarter. The Present Situation Index (PSI) increased 9.8 points and the Expectations Index (EI) 4.0 points. In both cases, the indicators remain in the adverse zone, with the PSI at 76.8 points and the EI at 70.1 points. As in the 4th quarter of 2022, the PSI result exceeded that of the EI, and the difference increased to 6.7 points, the highest since the 2nd quarter of 2012, when there was a gap of 15 points. However, in contrast to what can be observed today, on that occasion both indicators were in the favorable zone of the cycle (at 116.4 and 101.4 points, respectively).

The results for the 1st quarter of 2023 were compared to those for the same period in the years 2020, 2021 and 2022. The PSI for Latin America in 2023 surpasses that of the previous three years, as shown in Table 1. The EI, however, which had been in the favorable zone in 2020 and 2021, is well below these two years today, and 18 points below 2022. The ECI recorded a worsening in relation to the results of 2020 and 2021 and an improvement in relation to 2022.

What draws attention in this comparison is the deterioration in expectations in relation to the first quarters of the previous years and the improvement in the Present Situation Indicator. Even in the harsh periods of the pandemic, the expectations were favorable, as at the beginning of 2021, when the EI recorded 143.6 points. Regarding the improvement in the Present Situation, the result reflects the recovery of economic growth in the region in relation to the recessive period of the pandemic.

Economic climate: Results by country

Table 2 summarizes the Economic Climate results for the largest economies in the region monitored by FGV IBRE. Paraguay leads the improvement in the regional economic climate. Between the 4th quarter of 2022 and the 1st quarter of 2023, Paraguay recorded a rise of 47.6 points in the ECI, mainly influenced by the increase of 83.3 points in the PSI and 3.6 points in the EI. In 2022, the country suffered a heavy drought and lost exports to Russia as a result of the war in Ukraine, which helps explain the improvement in the indicators. The second stand out is Peru, which has shown a positive degree of resilience in political terms, despite the turbulence with the exit of the President elect.

Other countries with improvements in the economic climate were Mexico, Ecuador, Argentina, and Chile. It can be observed that all the countries recorded an advance in the ECI, with improvements in relation to both the PSI and the EI, with the exception of Chile, which maintained the EI level of the 4th quarter of 2022. Brazil is in the group that recorded a fall in the three indicators in the 1st quarter of 2023. The ECI fell 11.0 points to 73.5 points, with the PSI dropping 21.7 points to 70.6 points, while the EI had a reduction of a lower magnitude of 0.4 points to 76.5 points.

Differently to the aggregate result for Latin America, the level of the EI surpasses the PSI by 5.9 points. The scenario for Brazil described by the Survey is one of stability in expectations and an accentuated worsening (above 20 points) in the assessment of the present situation. Uruguay, Colombia, and Bolivia accompany Brazil in the fall in the ECI, although certain differences can be highlighted. In Brazil, all three indicators are in the adverse zone; Uruguay and Colombia, however, have a favorable assessment of the present situation.

Graphs 3, 4, and 5 show the results of the indicators of the selected countries in the 4th quarter of 2022 and the 1st quarter of 2023

GDP growth forecasts for 2023

Graph 6 shows the specialists’ GDP growth forecasts for 2023 made in the 4th quarter of 2022 and the 1st quarter of 2023. In this survey, growth for 2023 was revised upwards in Paraguay, Mexico, and Argentina. Paraguay stands out as the GDP growth forecast passed from 3.9% to 4.6%, the highest forecast growth rate in the region. In Mexico, the GDP variation increased from 1.4% to 1.7%, and in Argentina, from 1.1% to 1.2%. In all the other countries, the forecast reduced the growth rate, the largest difference being in Chile, which passed from a fall of 0.7% to -1.8%.

This is followed by Colombia, with a forecast going from 1.6% to 1.0%. The percentage differences for the remaining countries were of only 0.1% (Bolivia), 0.2% (Peru, Uruguay, and Ecuador) and 0.3% (Brazil). In Brazil the forecast fell from 1.4% to 1.1%.

The forecasts show a performance that is not very favorable, with most growth rates below 3%, which is worrying for a developing region with limitations to physical infrastructure and social development indicators. On aggregate for Latin America, given the small variations in the forecasts, the GDP growth rate fell from 1.5% to 1.4%.

Table 3 shows the incidence of responses in relation to the changes in the forecasts. In the set of analyzed countries, 61.3% responded that they revised their forecasts and 62.6% said that the revision was for a reduction in growth. In the case of Brazil, 50% of the interviewees said that they changed their forecast.

Table 4 shows the percentage for factors that positively affected the revised GDP forecasts, where the specialists can choose more than one factor. In Brazil, new stimulus measures (57.1%) was followed by improved political environment (28.6%), and the same percentage (14.3%) for each of the remaining items — reduced restrictive measures on mobility, improved internal macroeconomic conditions, and improved international macroeconomic conditions.

In Argentina, 50% highlighted the improved political environment and 50% other measures, where the respondents specify public spending related to the elections. Another case in which the percentage for Others is high is that of Colombia (100%), which is related to the increase in exports to Venezuela, based on the normalization of commercial relations between the countries. In Paraguay, it was the previously mentioned climate conditions that were the source of losses in 2022.

For Latin America, the highest percentage refers to the improved political environment (48.4%), followed by international macroeconomic conditions (37.5%). The improved political environment result was influenced by Mexico (100% of the specialists indicated this item as the reason for reviewing the country’s GDP growth forecast upwards) and Peru (100%).

Table 5 shows the factors that influenced a downwards revision for GDP growth in the 1st quarter of 2023 in relation to the 4th quarter of 2022.

In the case of Brazil, all the respondents (100%) highlighted a worsening in internal macroeconomic conditions, international macroeconomic conditions, the political environment, and the fiscal situation. Such unanimity was not identified in the other countries.

In the Others item, high percentages stand out for Argentina, with the 2023 elections as a negative factor for GDP performance, and Paraguay, with lower growth than expected in the agriculture sector.

For Latin America, the main items mentioned (above 50%) to explain the downwards revision in GDP growth were the worsening in international macroeconomic conditions (74.7%), the political environment (66.5%), internal macroeconomic conditions (58%), and the fiscal situation (55.2%).

Reading of Tables 4 and 5 shows that despite not being unanimous, the perceptions of the common items in the two tables have a greater incidence of negative influence for the factors affecting the GDP evaluation. The political environment stands out with the highest incidence of responses in the evaluation of those that forecast an improvement in GDP growth, with 48.4%, while it is the second item of those that forecast reduced growth (66.5%).