The Economic climate in Latin America worsens with more pessimistic expectations for the coming months

The Economic climate in Latin America worsens with more pessimistic expectations  for the coming months

The Economic Climate Index (ECI) for Latin America decreases in the second quarter of 2022 in relation to the previous quarter and to the same period in 2021. The region’s economy is doing better than at the peak of the pandemic but has not managed to recover the levels of 2019. The impact of the war in Ukraine was evaluated in a special survey. In short, only one country considers the war’s impact to be favorable for GDP growth, four countries evaluate the influence on GDP negatively, and in four countries the perception is that the effect could be neutral. 

The ECI decreased 11.7 points between the first and second quarter of 2022. In the same period in 2020, the ECI fell 46.1 points when the pandemic became the priority issue on the agenda of all countries, but it then began an upward trajectory, despite remaining in the adverse zone of the economic cycle. In the third quarter of 2021, the index reached the neutral level of 100 points, but returned to recording decreases in the following quarters, suggesting that the result is not explained only by the impacts of the pandemic. 

The fall in the ECI in the second quarter of 2022 was influenced by the result of the Expectations Index (EI), which records a difference of 21.4 points in relation to the previous quarter. The EI had been on a downward trajectory since the 2nd quarter of 2021 and enters the adverse zone in the 2nd quarter of 2022.

In the case of the Present Situation Index (PSI), the fall was of 3.5 points between the 1st and 2nd quarter of 2022. The indicator has remained in the adverse zone since the 2nd quarter of 2012.

In the comparative analysis below, the results for the 2nd quarter of 2022 were compared to those of the same period in 2019, 2020, and 2021. The 2022 indicators show a decrease in comparison with 2019 – the largest difference being in the EI (-22 points) – and an improvement in relation to 2020. In the comparison with 2021, however, there is an improvement in the current conditions, reflected in the PSI but a significant worsening in expectations captured by the EI, which fell 68.8 points in the period, suggesting a scenario of uncertainties associated with the possible impact of the war in Ukraine, in addition to specific domestic factors in each country. 

Economic climate: Results by country 

The 2nd table in the press release summarizes the Economic Climate results for the largest economies in the region monitored by FGV IBRE. 

In Table 1 (Press Release), the countries are ordered from the highest to the lowest variation in the number of points for the Economic Climate Index between the 1st and 2nd quarter of 2022. The ECI only increased in two countries during this period, Uruguay (14.2 points) and Brazil (2.1 points). The improvement in Brazil is associated with an improved evaluation of the present situation, given that the EI decreased. All the countries, except Uruguay, recorded an adverse economic climate. In the ECI ranking for the 2nd quarter of 2022, Brazil is in 9th place.

In the evaluation of the present situation, four countries recorded an improvement (Brazil, Colombia, Uruguay, and Bolivia) but only two can be found in the favorable zone of the cycle, Colombia and Uruguay. Brazil is placed tenth on the PSI list, with 30 points. Brazil’s improvement in the ECI is due to the PSI, however, the indicator climbed from only 15.4 points to 30 points, a result which remains extremely far from the favorable zone defined as being above 100 points. 

The Expectations Index advanced in Chile (15.4 points) and Paraguay (24.2 points), but the result failed to compensate for the worsening in the evaluation of the present situation in these countries. Uruguay and Paraguay are in the favorable zone of expectations. On the EI ranking, Brazil is in 3rd place with 100 points, behind Uruguay (166.7 points) and Paraguay (133.3 points). 

In summary, the worsening in the evaluation of expectations dominates the results of the economic climate in the selected countries.

The 3rd table in the press release shows the comparison of the ECI for selected countries in the second quarters of 2019, 2020, and 2021 with that of 2022.

Apart from Mexico, Ecuador, and Uruguay, in the 2nd quarter of 2022, all the countries experienced a worsening of the economic climate in relation to the same period in 2019. In comparison with the 2nd quarter of 2020, all the countries consider the present economic climate as better, except Chile. This was the period at the beginning of the pandemic without vaccines. Compared with the 2nd quarter of 2021, the ECI worsened for all the countries except Ecuador and Uruguay. Brazil recorded the second largest fall, after Chile. When analyzing the components of the ECI, the decrease is mainly explained by expectations. In the case of Brazil, the difference in the EI between the 2nd quarter of 2022 and the 2nd quarter of 2021 is a negative 82.4 points. 

GDP growth forecasts for 2022

Graph 6 (Pres Release) shows the specialists’ GDP growth forecasts for 2022 made in the 1st quarter of 2022 and the 2nd quarter of 2022. In this survey, growth in 2022 was revised downwards in Mexico, Chile, and Paraguay with differences of 0.6, 0.9, and 2.4 percentage points, respectively, which is compatible with the worsening economic climate. The upwards revision for the GDP in Uruguay (0.8 percentage points) and Brazil (0.1 percentage points) coincides with the improved ECI between the 1st and 2nd quarter of 2022. In the other cases, the economic climate worsened between the first two quarters of the year. It can be observed, however, that the upwards revisions do not reach one percentage point. After Uruguay, the largest variation was in Colombia with 0.4 percentage points.

The survey highlighted the war in Ukraine, evaluating its impact on the economy of the evaluated countries. Table 4 (Press Release) presents the results of the survey. In relation to the effect of the war on the GDP growth forecast, the only country where the percentage of responses indicating an improvement predominated was Colombia (53.3%). The increase in the price of oil had a positive influence on exchange terms and the analysts indicated that exports would improve and, as such, there is a favorable perspective in the country’s GDP forecast. 

In all the countries, the analysts emphasized the impact of the war on the increased inflation rate. In this case, the adoption of restrictive monetary policies may have influenced the downward revision of GDP in certain countries, although other factors can be highlighted in the case of countries with a percentage of responses above 50% regarding the worsening in GDP. These countries are Paraguay (90%), Chile (76.9%), Mexico (70%), and Peru (63.6%). Among these countries, only Paraguay signaled a worsening of exports, which would be associated with the interruption of meat exports to Russia with its exclusion from the SWIFT system. It can be observed that Russia accounts for 20% of the meat exports from Paraguay. In addition, drought has harmed soy exports from the country. No other country in this group highlighted a worsening in exports or percentages above 50% in relation to increased imports. 

The countries with percentages above 50% on the “about the same” item (no alteration in the GDP forecast) were Argentina, Bolivia, Brazil, and Uruguay. The second highest percentage for Argentina, Bolivia, and Brazil is a negative impact on GDP. In Uruguay, the second largest impact would be positive. 

In summary, one country considers the impact of the war favorable for an increase in GDP, four countries identified a worsening in GDP, and a neutral effect predominates in the other four, but with 3 of these countries placing a negative effect in second place. Only Ecuador failed to record a percentage above 50% in any of the options presented. The aggregate result shows a percentage of 40.5% for the response of about the same and 47% for a worsening in GDP.

Could the war be favorable to exports? Argentina, Brazil, Colombia, Mexico, and Uruguay responded with percentages greater than or equal to 50%. For the Mercosul countries, the increased prices of agricultural commodities and increased sales with the reduced supply from Russia and Ukraine explain the positive effect. In aggregate terms, exports improve. 

For the trade balance result, a neutral effect predominates in the region. In the case of Brazil, 60% of the analysts consider that the war will have a positive impact on the balance.

Main situational and structural problems
Table 5 (Press Release) shows the importance attributed to selected themes for the economic growth of the countries. If the result is above 50 points, the theme is relevant, and the higher the score, the greater its importance. Below 50 points, the theme is less relevant, and the lower the score, the lower the importance as a barrier to economic growth. 

For the analysis of the results, the questions can be divided into two groups. The first group refers to questions of a structural character, as they demand investment and changes in the medium to long term. The following components can be highlighted in this group.

The main problem in Latin America is lack of innovation, with a score above 50 points in all the selected countries. The third most important issue is corruption, except for in Chile (33.3 points) and Uruguay (0 points). Inadequate infrastructure is the fourth main problem with a score above 50 points in all the countries. The fifth problem is widening income inequality, except for in Chile and Paraguay, with scores below 50 points. The sixth problem is a lack of international competitiveness, again with Chile as the only exception. The lack of qualified labor, which is associated with the level of education in the population, is the ninth problem in the region, except in Argentina. The tenth barrier to growth is lack of capital, except in Brazil (44.4 points), Paraguay (40 points), Peru (45.5 points), and Uruguay (16.7 points). 

The second group includes issues that depend on the economic policy guidelines of the governments in the execution of their functions. The second most important barrier to economic growth is the lack of confidence in the government's economic policy, the only exception being Uruguay (16.7 points). The seventh problem is the legal and administrative barriers for investors, except for Chile (41.7 points), Paraguay (36.4 points), and Uruguay (0 points). The eighth problem is political instability, except for Bolivia, Paraguay, and Uruguay. The tenth problem is the unfavorable climate for foreign investors, except for in Brazil (20 points), Colombia (46.7 points), Paraguay (9.1 points), and Uruguay (0 points). Insufficient demand is the twelfth problem, with the exception of Chile, Colombia, Paraguay, Peru, and Uruguay. 

The COVID-19 pandemic is no longer a relevant issue, except in Mexico (70 points). Trade barriers to exports have a score of 25.5 in the region but are particularly relevant in Argentina and Bolivia. Inefficient debt management and lack of confidence in the central bank’s policy are relevant themes for Argentina but not for the region. 

Uruguay stands out, given that of the 16 analyzed items, only 5 received a score above 50 points. In the group of situational themes, the attribution of 16.7 points to lack of confidence in the government's economic policy and zero for political instability demonstrate a high approval rating for the government, which explains the favorable economic climate in the country. 

In Brazil, the items with a score below 50 points are lack of capital, an unfavorable climate for foreign investors, the pandemic, trade barriers to exports, inefficient debt management, and lack of confidence in the central bank’s policy.
Graph 7 (Press Release) describes the three main problems faced by each country.