The Economic Climate Index (ECI) for Latin America rises between the 3rd and 4th quarters of 2022, influenced by improved perceptions regarding the present moment. Brazil recorded an increase of 30 points on the ECI, of 49.4 points on the PSI and 10.2 points on the EI. The less expressive rise in the EI in relation to the PSI, and its decrease in certain countries indicates that the economic growth scenario for the next six months is likely to slow down in the region. Forecasts of lower GDP growth rates for 2023 in relation to 2022 corroborate the specialists’ caution regarding the coming months.
The Economic Climate Index (ECI) for Latin America rose 11.8 points between the 3rd and 4th quarters of 2022. Despite the favorable marginal result, the index remains at 66.5 points, a level considered adverse. As shown in Graph 1, the ECI has remained at a low level since the 3rd quarter of 2013, with the exceptions of the 4th quarter of 2017, the 1st quarter of 2018, and the 3rd quarter of 2021. In all these quarters, the index was close to 100 points, which marks the limit between the favorable and adverse zones.
The increase in the ECI is associated with the behavior of the Present Situation Index (PSI), which rose 22.7 points between the 3rd and 4th quarters of 2022, to 67.0 points. The Expectations Index (EI) recorded 66.1 points, a variation of only +0.6 point, indicating stability. The two indexes are now very close to each other and remain in the adverse zone of the economic cycle. This is also the first time since 2012 that the PSI has risen (slightly) above the EI.
In the table below, the results for the 4th quarter of 2022 were compared to those for the same period in previous years. The EI and ECI for 2022 show a decrease in comparison with 2019 and 2020, the greatest difference being in the EI (-76.7 points) in relation to the 4th quarter of 2020. In the case of the PSI, the difference favors the result of the 4th quarter of 2022, especially in relation to the 4th quarter of 2020. What do these results demonstrate?
At the end of 2020, when the pandemic was not yet under control, there were expectations of improvement (the EI was 142.8 points). At that moment, the present situation was considered extremely adverse, and the PSI was only 19.6 points. Now, the present situation is improving, but the expectations point to a less favorable scenario for the next 6 months.
Economic climate: Results by country
Table 2 summarizes the Economic Climate results for the largest economies in the region monitored by FGV IBRE.
Brazil leads the improvement in the region, recording increases of 30 points on the ECI, 49.4 points on the PSI, and 10.2 points on the EI between the 3rd and 4th quarters. In addition, the evaluation of the PSI (92.3 points) exceeded expectations (76. 9 points). Brazil recorded the third highest ECI, PSI, and EI on the ranking for the 4th quarter of 2022, as shown in graphs 3, 4, and 5. Despite the improvement, all the indices remain in the adverse zone.
Five countries improved their position on the ECI, but only Paraguay and Uruguay are in the favorable zone. On the PSI, six countries improved their position, but only Colombia and Uruguay are in the favorable zone. On the evaluation of expectations, four countries improved their position, but only Paraguay is in the favorable zone, while Uruguay is in the neutral zone. It can be observed that both Paraguay and Uruguay recorded falls in the EI, while Brazil, Peru, Chile, and Colombia were the countries that gained points on the EI.
In summary, in the 4th quarter of 2022, there was an improvement in the present situation driven by the largest economies in the region, but expectations gained little or decreased.
GDP growth forecasts for 2022 and 2023
The EI in the adverse zone despite the improved perception of the present situation helps explaining the GDP growth forecasts for 2023 (Graph 6). Only in Paraguay is the forecast for 2023 greater than that for 2022. In this case, the severe drought observed in 2022 that led to a forecast of zero growth for 2022 explains the improvement.
Main problems in selected countries
Table 3 shows the importance the specialists attribute to selected issues presented as barriers to the economic growth of the countries. Scores vary from 0 to 100 points. Scores above 50 points indicate that the issue is relevant, and the higher the score, the greater its importance. If the score is below 50 points, the theme is not relevant, and the lower the score, the lesser the relevance. The table is ordered according to the importance of the problems for the Latin America group. The main problems that recorded scores above 50 points, in decreasing order, were lack of innovation, inadequate infrastructure, lack of confidence in the government's economic policy; lack of international competitiveness, corruption, widening income inequality; unfavorable climate for foreign investors, political instability, legal and administrative barriers for investors, lack of qualified labor, difficulty in the supply of inputs, and lack of capital. Of the 17 problems listed, 12 score above 50 points.
Lack of innovation received the highest score in Latin America, being above 50 points in all the countries, reaching 100 points in Brazil. Inadequate infrastructure is second with scores greater than or equal to 50 in all the countries, Brazil again scoring 100. Third is lack of confidence in the government's economic policy, with all the countries above 50 points and Brazilscoring 79.6 points. Lack of international competitiveness is fourth, whereby only Chile does not consider this issue relevant and Brazil scores 92.3 points. The fifth is corruption, which is not a relevant question in Uruguay, while Brazil scores 76.9 points. Widening income inequality is sixth, the issue not being relevant in Bolivia or Paraguay, whereas Brazil reaches 92.3 points.
The seventh is unfavorable climate for foreign investors, an issue which is not relevant in Paraguay or Uruguay. In Brazil, the score was 69.2 points. In the Survey of the 2nd quarter of 2022, the same item scored only 20.0 points, there has been, however, a shift in the perception of the specialists, who now consider the climate for foreign investors a relevant barrier at the present time. The eighth problem is political instability with a score of 69.8 for Latin America and 76.9 points for Brazil, an increase of 6.9 points in relation to the 2nd quarter survey. The ninth item is legal and administrative barriers for investors, which is not relevant for Chile, Paraguay, or Uruguay, but scored 61.5 points in Brazil. Lack of qualified labor received 67.6 points in Latin America and 92.3 points in Brazil. Difficulty in the supply of raw materials had a similar score for Brazil (61.5 points) and Latin America (63.0 points). Lack of capital is not a relevant issue for Brazil.
The five biggest barriers in Brazil, all of which received scores above 90 points were lack of innovation, inadequate infrastructure, lack of international competitiveness, widening income inequality, and lack of qualified labor. For Latin America, among the 5 main problems, only lack of innovation scored above 90 points, while widening income inequality and lack of qualified labor are not among the 5 biggest issues.
Further relevant information extracted from this Survey is the percentage of specialists that selected the main problems in their given country. In Brazil, 46.2% selected lack of confidence in the government's economic policy, and the percentage was the same for political instability. In second place, with a percentage of 38.5%, were inadequate infrastructure and widening income inequality. It can be observed that lack of confidence in the government's economic policy and political instability recorded high percentages in all the countries, with the exception of Uruguay, where it is not cited.