The economic climate in Latin America improves but remains unfavorable

The economic climate in Latin America improves but remains unfavorable

For the first time since the impact of the COVID-19 pandemic, there has been an improvement in perceptions in relation to the current situation, which remains difficult in most countries. Regarding expectation, the result is extremely varied. See below for the aggregated results and for some of the main economies in the region.

The Economic Climate Index (ECI) for Latin America by the Getulio Vargas Foundation (FGV)1 increased from 60.7 to 70.5 points between the fourth quarter of 2020 and the first quarter of 2021. Despite the 9.8-point improvement, the index remains in the adverse zone of the economic cycle with a combination of unfavorable evaluations regarding the present situation and optimistic expectations in relation to the near future.

The ECI is the geometric mean between the Present Situation Index (PSI) and the Expectations Index (EI). The increase in the ECI in the first quarter of 2021 was influenced by the advance in the PSI, which rose 13 points (to 19.4 points) compared to the fourth quarter of 2020, when it recorded 6.4 points; its worst result since the series began in the first quarter of 2001. Nevertheless, this is still the third worst result of the PSI historical series for Latin America.

The EI remained practically stable in Q1 of 2021, with a slight increase from 142.8 to 143.6 points, remaining in the favorable zone of the cycle (above 100 points) for the third consecutive quarter.

The general result of the survey demonstrates that the specialists continue to evaluate the current situation unfavorably but are optimistic with the perspective of improvements in the coming months. Among the factors justifying this optimism is the launch of immunization programs against COVID-19 in the main economies of the world and in Latino countries, albeit with very different timetables and vaccine offers. The countries' results help clarify this behavior.

Economic climate Results by country
The Economic Climate improved in only half of the ten largest economies in the region followed by FGV IBRE, although the advances were more expressive than the losses.

There was an increase in the ECI in Argentina, Brazil, Chile, Mexico and Paraguay, especially in the cases of Paraguay (rise of 37.0 points on the ECI), Chile (26.7 points), and Mexico (19,7 points). In Brazil, the ECI advanced 5.1 points, from 67.2 to 72.3 points. In the opposite direction, Bolivia, Colombia, Ecuador, Peru and Uruguay all recorded a decrease in the ECI. The loses remained below 10 points, with the biggest drop, of 9.3 points, occurring in Peru. In the group of countries that improved the ECI, the PSI advanced in all cases, with Paraguay (+63.5 points), Chile (+23.3 points), Mexico (+20.0 points), and Brazil (+11.7 points) standing out. In the case of expectations, Brazil and Paraguay recorded decreases. In Brazil, the EI fell 9.2 points.

In the group of countries with a decrease in ECI, in all cases the expectations index retreated. The largest drop occurred in Bolivia (-72.2 points) and the smallest in Colombia (-21.9 points). With the exception of Peru, all the countries in this group recorded an increase in the PSI.

In summary, the PSI improved in all countries except Peru, which recorded a slight decrease of one point between the fourth quarter of 2020 and the first quarter of 2021. The highest index was that of Paraguay (77.8 points), followed by Bolivia and Chile, both with 33.3 points. Brazil recorded a PSI of 25.0 points. However, the level of the PSI remains low in all the countries, demonstrating that the region is still far from reaching a favorable phase of the economic cycle.

The EI fell for all the countries, except Argentina, Chile and Mexico. In the other countries, although the EI decreased, it remained in the favorable zone, except in the cases of Bolivia and Ecuador. Among the countries with the EI in the favorable zone, Chile recorded the highest value (187.5 points), and Brazil the lowest (137.5 points).

Forecasts for growth in GDP for 2021
The forecasts of the analysists of the Latin American Economic Survey are described in Table 1 in the Press Release. As would be expected, after the recession of 2020 associated with the shock to supply and demand brought about by COVID-19, recovery is projected for the Latin American economies. The fall in the GDP of the countries in 2020 is replaced by an increase in the product, although there is no guarantee of a return to the levels of 2019 in all countries.

This recovery, however, is tempered by relative pessimism. The decrease in the expectations indicators is emphasized and Table 2 in the Press Release reflects this evaluation. In the last three months, 73.1% of those interviewed changed their projection for 2021, and, of these, 58.9% reduced the expected value for economic growth in their respective countries. Among the countries in which most of the consulted specialists revised their projection upwards are Argentina (57.1%); Bolivia (75.0%), Chile (100%), and Paraguay (75.0%). In the two largest economies in the region, most of the specialists revised their projections downwards: Brazil (66.7%) and Mexico (63.6%).

What could have motivated the revisions in growth forecasts? Table 3 in the Press Release shows the weight that the specialists attribute to different factors in their revised GDP projections (upwards or downwards). A result of 100% means that in the table referring to factors for improvement, they all consider the item relevant. This same 100% in the table on factors for revising downwards, demonstrates that there is unanimity in the selected factor that led to downgrading GDP growth projections.

In the group of countries that revised GDP growth projections upwards, the weight of the factors varies. In Chile, the main factor was the arrival of the vaccine earlier than expected (100%), followed by better national (60%) and international (60%) macroeconomic conditions. In Bolivia, the main factor was the improved political environment (66.7%), followed by early arrival of the vaccine, national and international macroeconomic conditions and new stimulus measures, all with results of 50,0%. In Paraguay, early arrival of the vaccine and better national macroeconomic conditions, both with 66.7%, explain the result. In Argentina, where the difference between those that revised their projection upwards (57.1%) and those that revised their projection downwards (42.9%) was lower than that of the other countries in this group, international macroeconomic conditions stand out.

Brazil leads the ranking of the group of specialists that revised their GDP forecast downwards. In the case of Brazil, the second wave of COVID-19 (87.5%), the political environment (87.5%), and the delay in vaccination (75.0%) were highlighted. The second wave of COVID-19 also stands out in the cases of Colombia, Mexico, Peru, Ecuador and Uruguay.

New stimulus measures contributed little to improved GDP forecasts (only Bolivia, where the factor was cited by 50.0%) and the election of Biden only had a relevant repercussion in Mexico (100%), followed by Chile (40%).

In summary, the second wave of COVID-19 and the evaluation as to whether vaccination began earlier than expected or not, are the most relevant factors for the revisions in GDP forecast for 2021, followed by the political environment and macroeconomic conditions.