Latin America’s Uneven Q1 2016 GDP Growth

We review here GDP growth dynamics in Colombia, Chile, Brazil and Mexico. In the first quarter of the year, we observed uneven performances throughout the region. Positive surprise: Brazil. Negative surprise: Colombia. In between: Chile and Mexico. Ahead, second quarter GDP in Colombia and Mexico will benefit from higher oil prices.

In short, we observed uneven performance throughout the region, with Chile and Mexico growing at a subdued pace; Colombia decelerating; and Brazil apparently beginning to recover from a deep recession. We remain cautious over what to expect ahead, as Venezuela’s contagion risks in case a default is confirmed could widen regional CDS spreads and spur FX volatility. But more importantly, exports are unlikely to recover any time soon, and interest rate hikes and subdued global growth will prevent fast-paced recoveries.

1Q16 economies

COLOMBIA: Disappointing start of the year.

Colombia’s GDP grew 2.5% year-over-year (YoY) in the first quarter, slowing from an upwardly revised 3.4% expansion in 4Q15 and disappointing analysts’ expectations of a 2.6% growth. The Colombian economy is expected to expand by 2.5% this year, which is going to be the lowest growth in the decade, only behind 2009, when the global financial crisis reached Colombia.

Oil is still affecting industrial production. Mining output fell at a faster pace (-4.6 percent, following a 1.5% decline in Q415) and growth in agriculture (+0.7% from +5.8% in Q4) was affected by El Niño, which also brought higher-than-expected inflation. Contrastingly, the highlight of the 1Q16 GDP growth report was manufacturing. Output grew at a 5.3% from +3.9% percent in Q4. Construction also accelerated in the first quarter of the year (+5.2% from 4.6% YoY in the previous quarter).Restrictive monetary policy will play a key role ahead. Banrep (central bank) increased Colombia’s interest rate in its last meeting by 25bps, reaching 7.25%, as a measure to set back inflation, which reached 8% earlier this year.

CHILE: The economy accelerated its pace of expansion at the beginning of the year.

GDP rose 2.0% YoY in 1Q16 versus a 1.3% YoY increase in 4Q15.Positive surprises were observed in gross fixed investment, which is again expanding, and exports, which surpassed the growth seen in the previous 8 quarters, supported by services and stronger copper exports. While mining activity marked in March its 2nd straight month of expansion (+4.9% YoY) mainly explained by copper output, manufacturing activity expanded at its fastest pace in 15 months (+2.67% YoY in March). Contrastingly, the deterioration in the labor market continues, and public spending cuts announced recently will prevent the economy from growing at a faster pace than currently expected.

Consumption and public spending are still supporting growth. Durable and non-durable goods accelerated their pace of expansion. While the former increased at their fastest pace since the end of 2013 (+4.0% YOY), the latter did so by 2.1% YOY (vs. -0.7 and 1.5% YOY in 2015). Meanwhile, after rising 5.7% YoY in 2015, public spending growth moderated slightly at the beginning of the year, climbing 5.4% YoY in 1Q16. Still, there are reasons to remain cautious ahead, as the government’s commitment to maintain fiscal discipline and to achieve a 2016 structural deficit target of 1.3% of GDP (vs. 2.2% of GDP in 2015) in a scenario of lower copper prices.

BRAZIL: Still contracting, but (painfully) slowly improving.

GDP recorded, once again, a severe contraction in the first quarter of 2016. Besides marking a recession for the 4th consecutive period (-0.3% QoQ and -5.4% YoY), the 1Q16 GDP report showed that the drop in private spending and gross fixed investment more than offset the improvement in public expenditure and the positive effect from net exports. Positively, the 0.3% QoQ decline was much less than the 1.3% plunge observed in the last quarter of 2015. The print also came better than expected by consensus (0.8%, Bloomberg poll).

The Brazilian economy will likely moderate its pace of contraction in the following quarters, mainly backed by a boost from the external sector and a less severe decline in investment. Downside risks lie on the deteriorated prospects for private consumption and government spending. The latest survey by the Central Bank showed that economists improved the 2016 GDP growth forecast for the third straight week. Still, GDP is expected to contract 3.7% this year. For 2017, economists expect GDP to expand 0.55%. The country will once again underperform its regional peers in terms of GDP growth. Brazil faces a dilemma, as debt is rapidly growing but spending cuts will hamper a fast-paced recovery.

MEXICO: GDP remains subdued, but some sectors are improving.

The economy expanded a revised 2.6% on an annualised basis. That is a 0.8% quarter-on-quarter (QoQ) hike following a 0.5% QoQ (and 2.2% YoY) uptick in 4Q15. Formerly, 2.5% GDP expansion in 2015 came below market expectations but above the 1.4% and 2.1% expansion rates for 2013 and 2014, respectively. Growth picked up in 1Q16 on stronger domestic spending and as industrial output gained some steam. The services sector expanded 3.7% from a year earlier, while industrial activity increased 0.4% after several quarter on the red.

After the report was released, Mexico’s government cut its 2016 growth outlook to 2.2-3.2% from 2.6-3.6%. Deputy Finance Minister Fernando Aportela pointed to weak industrial output in the United States that has directly hit Mexican exports. Still, in May’s poll of market expectations by Mexico’s central bank, Banxico, for 2016, economists increased both their GDP and exchange rate estimates, while cutting their inflation forecast.

gdp growth

LATAM PM’s Take: Oil prices have recovered nearly 92% from the lows observed earlier in the year. This should help GDP growth in both Colombia and Mexico, as industrial production is highly dependent on oil activity. However, Colombia will likely be affected by monetary tightening and Mexico could be pressured ahead by bold cuts in public spending. In Chile, the balance of risks seems balanced, and regional contagion fears from a hypothetical Venezuelan collapse seem particularly contained in Chile, which is one of the least indebted countries in LatAm. Finally, Brazil is expected to remain in recession throughout the year, but the one thing to watch is whether Temer’s policy mix is well-received by investors and consumers. The one thing to look at: the weekly central bank poll of GDP and inflation expectations. The key lies there.

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