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LatinFocus forecasts regional GDP to expand 3.7% and average inflation 6.6%

Paraguay, Peru, Chile and Venezuela should have the best performance

LatinFocus Consensus Forecast panellists expect regional GDP to expand 3.7% this year, following an estimated 2.9% increase recorded in 2012. The stable figure reflects rosier prospects for Chile, Paraguay, Peru and Venezuela, which were offset by downward revisions to Brazil, Colombia and Uruguay.

Meanwhile, growth estimates for Argentina, Bolivia, Ecuador and Mexico were left unchanged over December. For next year, the panel sees regional growth accelerating to 4.0%.

Within the region, the panel expects Paraguay to be the fastest-growing economy in 2013, and to rebound from an estimated 1.3% contraction in 2012 to a staggering 9.1% expansion. Peru, with a projected expansion of 6.0%, is expected to be the second fastest-growing economy this year, followed by Bolivia (+4.8%) and Chile (+4.7%). Meanwhile, the panel forecasts regional giants Brazil and Mexico to both expand 3.5% this year.

Global economic developments at the outset of the year have been broadly positive. In the United States, Republicans and Democrats reached a last-minute agreement to avoid the dreaded fiscal cliff, while in Japan, newly-elected Prime Minister Shinzo Abe has announced massive monetary and fiscal stimulus measures in an attempt to jumpstart the economy.

Moreover, Chinese GDP expanded 7.9% in the final quarter of 2012, which came in above the 7.4% rise seen in Q3 and thus ended a streak of seven consecutive quarters of decelerating growth. That said, softer growth around the world is already taking its toll on Latin America, as shown by trade data. In November, exports decelerated markedly in Mexico, while recording an outright contraction in both Argentina and Colombia.

Furthermore, data for December showed that Brazilian exports dropped for a seventh month in a row. Only exports in Chile and Peru, underpinned by their strong mining sectors, have shown resilience in the final months of the year.

In Brazil, although there is widespread consensus that the worst is now over, the economic outlook remains lacklustre. In November, growth in retail sales slowed while industrial production fell 0.6% over the previous month in seasonally adjusted terms. Moreover, consumer confidence fell to its lowest level in 11 months in December. Nonetheless, LatinFocus Consensus Forecast panellists expect growth to pick up from a paltry 1.1% in 2012 to 3.5% in 2013. For 2014, the panel expects the economy to expand 3.9%.

On the monetary policy front, regional central banks are divided amid significant differences in growth prospects and inflationary risks, as well as the different levels of pressure on their currencies. On the one hand, while the Peruvian Central Bank refrained from raising interest rates, monetary authorities did tighten the reins by increasing the average reserve requirements ratio by 25 basis points on local currency deposits and by 75 basis points on foreign currency deposits. Furthermore, in an attempt to prevent further appreciation of the Peruvian Sol - which by the end of December had reached its highest level in more than 15 years against the U.S. dollar - the Central Bank continued to intervene in the foreign exchange market and, on 18 January, approved a rise in the limit on investment abroad by private pension funds (AFP) from 30% to 32%, in a move aimed at offsetting capital inflows. The decision provides private pension funds with an additional USD 750 million to invest in international markets.

Elsewhere, central banks in Brazil and Chile left the policy rate unchanged and hinted that their policy stance will remain on hold in the months ahead. The Mexican Central Bank, despite surprising analysts with its overtly dovish tone, also left the policy rate unchanged, while Colombia's BanRep cut the monetary policy rate by a further 25 basis points to 4.25% amid a sharp slowdown in economic growth in Q3 2012.

Regional average inflation ended the year at 6.1%, which was a full percentage point below the 7.1% recorded in 2011. LatinFocus Consensus Forecast panellists expect regional average inflation to accelerate somewhat and reach 6.6% by the end of this year, which is down 0.1 percentage points from last month's forecast. For next year, the panel anticipates inflation will moderate to 6.4%. (Focus Economics)