Economic Power In Latin America Shifting From Brazil To Mexico

Over the last year three key factors have weighed heavily on Latin American economies: The end of the U.S. Fed’s quantitative easing, which has brought about less favorable international funding conditions; the decline in commodity prices, which has depressed LatAm export revenues, and the Chinese economic slowdown, which also has hit commodity-exporting countries in the region. As a result, economic growth this year has been a huge disappointment. In January, the consensus forecast was for GDP growth of about 3%, but now expectations have fallen dramatically to a 0.4% contraction.

The impact of the shocks, though, has been uneven across the region, reflecting very different economic fundamentals in each country. Brazil, the biggest economy in the region, is the standout disaster area, suffering its worst recession in 25 years. This alone has been responsible for most of the sharp deterioration in growth expectations for LatAm as a whole. The list of problems in Brazil is daunting: Interest rates have rocketed in the face of high inflation; confidence has been depressed by corruption scandals; and the public finances are a mess. As a result, the labor market has fallen apart. Ultimately, these problems are the self-inflicted consequences of President Rousseff’s inappropriate populist policies, state interventionism, and a lack of real structural and fiscal reform. No one should have been surprised when Brazilian debt was downgraded to junk status in September by Standard and Poors, while the currency, the real, has lost about 30% this year against the dollar.

As a result of the appalling situation in Brazil, economic power in the region has shifted rapidly to Mexico, the second biggest economy in LatAm. Mexico’s growth has been hampered by the crash in oil prices but the economy is growing, by around 2% year-over-year, and the economic outlook is positive. Solid domestic economic fundamentals, and my expectation of a resilient and improving U.S. economy over the next year, should help push Mexican growth towards 2.5%.


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