The Economic climate in Latin America remains on a downward trend despite a slight improvement in expectations

The Economic climate in Latin America remains on a downward trend despite a slight improvement in expectations

In the comparison of January’s GDP growth forecasts for this year with those made in October of last year, there was an improvement only in Colombia, Bolivia, and Uruguay. Brazil stands out among the countries with the worst GDP growth forecasts. The worsening of internal macroeconomic conditions and the political environment were among the main factors mentioned by specialists for the weaker forecasts in this quarter.

The Economic Climate Index (ECI) for Latin America decreased by 1.6 points between the fourth quarter of 2021 and the first quarter of 2022, maintaining the negative trend observed in the previous quarter. The indicator had previously recorded five consecutive rises after reaching the lowest value in the historical series (41.7 points) in the 2nd quarter of 2020. 

The fall in the ECI was influenced by worse evaluations on the current situation. The Present Situation Index (PSI) declined 5.7 points in the quarter, from 58.0 points to 52.3 points. The PSI has been in the adverse zone since the 2nd quarter of 2012, which is a situation that is consistent with the slow growth in the region after the previous cycle of high commodity prices. However, the Expectations Index (EI) remains in the favorable zone and rose 3.5 points in the same period to 108.6 points.

Economic climate: Results by country 

Table 1 summarizes the Economic Climate results for the largest economies in the region monitored by FGV IBRE. 

In Table 1, the countries are ordered from the highest to the lowest variation in the number of points for the Economic Climate Index between the 4th quarter of 2021 and the 1st quarter of 2022. The ECI only increased in two countries during this period: Argentina and Uruguay. The rise in Argentina’s ECI was driven by advances in both the PSI and the EI. In Uruguay, there was a worsening in expectations and an improvement in the present evaluations. Despite this quarterly improvement, the ECI for Argentina remains in the adverse zone.  

Colombia recorded the largest fall of 28.2 points, although its ECI remains favorable. In addition to Colombia and Uruguay, the ECI also remains above 100 points in Paraguay. The ECI for Brazil decreased 2.8 points and is now the lowest in the region at 60.6 points. 

The PSI for Brazil fell 39.1 points between the last two Surveys, closing at only 15.4 points in the 1st quarter of 2022, which is a relatively close level to that of the 4th quarter of 2020 (13.3 points). On the other hand, increases were observed in the PSI in Mexico, Chile, and Colombia, in addition to Argentina and Uruguay, mentioned above. Chile stands out with a rise of 30.8 points. Uruguay, Chile, Paraguay, and Colombia are all in the favorable zone of the PSI.

Expectations worsened in all countries except Argentina and Brazil. In these two cases, there were gains of 45.3 points and 42.7 points, respectively. Even with the drop in the EI across the countries, only Chile and Bolivia record an EI in the adverse zone.

Three EI cases stand out: the improvements in the EIs in Brazil and Argentina and the deterioration in expectations in Chile since the 3rd quarter of 2021.

The revised GDP growth forecasts for the countries in the region help clarify some of these results.

GDP growth forecasts for 2022

Graph 6 shows the specialists’ GDP growth forecasts for 2022 made in the 4th quarter of 2021 and the 1st quarter of 2022. In this survey, growth in 2022 was revised upwards in Colombia, Bolivia, and Uruguay. The differences in those revised downwards were less than 0.2 percentage points for Paraguay, Ecuador, Argentina, and Chile. In Peru, expected growth decreased from 3.5% to 2.7% and in Brazil, from 1.8% to 0.7%. Brazil leads the list of the countries with the lowest growth forecast for 2022.

The specialists were asked to identify which factor(s) most influenced their revision of GDP growth for their respective country in 2022. The respondents could choose as many factors as they wished. In all the countries, more than 50% of the specialists revised their forecasts, and in most cases the revision was downwards (Table 2).

Among the respondents that revised their economic growth forecast upwards (Table 3), the factors that most occurred among the responses (highest percentages) were the decrease in COVID-19 cases and improved internal macroeconomic conditions. In Brazil, only 10% of the specialists revised their GDP growth forecast upwards, highlighting these two factors. Bolivia was the country that recorded the highest gain in revised GDP forecasts, from 3.3% to 3.8%, with the specialists highlighting improved international macroeconomic conditions and new stimulus measures as factors in the result. 

As seen above, there were increases in the ECI in Argentina and Uruguay in this edition of the Survey. In the revision of the GDP forecasts, Uruguay went from 2.9% to 3.0%, while Argentina dropped slightly from 2.6% to 2.5%. The differences are small but analysis of the factors in improved GDP growth forecasts is valid. In the case of Uruguay, improved internal macroeconomic conditions and reduced restrictions on mobility were the factors most frequently mentioned. In Argentina, the theme of mobility (88.9%), followed by the drop in the number of COVID-19 cases (44.4%) and stimulus measures (44.4%) were all cited.  

Table 4 shows the factors that the specialists in each country indicated to justify their downwards revision for GDP growth. On average, the responses with the highest number of incidences were the worsening in internal macroeconomic conditions, the appearance of the Omicron variant, and worsening of the political environment. 

The case of Argentina stands out once again, where, despite the rise in the ECI, 100% of the specialists revised GDP downwards due to the worsening in internal macroeconomic conditions and worsening of the domestic political environment. Among the other factors that explained the downwards revision, the delay in reaching an agreement with the IMF (50%) was also mentioned, something which would occur after the for this edition of the Survey was collected. It is possible that if President Fernandez manages to approve the IMF package, the expectations in Argentina will improve, as this would also signal support for his government.

In Paraguay, the factor with the highest incidence of responses among the group of specialists that revised the GDP forecast downwards was the drought in the country and its effects on the agricultural harvest.

In summary, improved internal macroeconomic conditions and a reduction in COVID-19 cases are positive factors for economic growth. In certain countries, the relaxing of mobility restrictions was highlighted, as in Paraguay, Argentina, Colombia, Ecuador, and Uruguay. In Brazil, no specialist selected this factor.

Percentages greater than or equal to 50% for the worsening in macro conditions were recorded in Mexico, Argentina. Ecuador, and Brazil. Percentages greater than or equal to 50% for worsening in the political environment were recorded in Peru, Argentina, Ecuador, Brazil, and Chile.

In Argentina and Brazil, the worsening macroeconomic situation goes hand in hand with the worsening in the political environment. However, these two countries were the only countries to record an improvement in the Expectations Index, with variations above 40 points.