Economic woes signal gloomy year for Latin America

Economic woes signal gloomy year for Latin America

Latin America’s two biggest economies contracted in the first quarter of 2019, setting the stage for a gloomy year in a region struggling to recover from low commodity prices and weak productivity.

Brazil’s gross domestic product fell 0.2 per cent in the first three months, as business soured on President Jair Bolsonaro’s plans to revive growth and investment stagnated. In Mexico, the region’s second-biggest economy, a weak services sector dragged growth down, also by 0.2 per cent.

“There was certainly the impact of negative shocks to activity in both Brazil and Mexico,” said Alberto Ramos, head of Latin America research at Goldman Sachs. “But the mediocre growth performance is not new as, rather than cyclical issues, it reflects lingering policy uncertainty . . . and a backdrop of very low potential growth give the lack of deep-cutting, pro-growth, pro-investment reforms.”

In Argentina, where President Mauricio Macri faces a tough re-election battle in October amid a deep recession and falling living standards, first quarter data are not published until next month. Analysts expect another contraction, albeit at a slower pace than in the previous three months.

With weaker growth also hurting Chile and Peru, and Venezuela falling deeper into the worst slump in Latin American history as US sanctions and a collapse in oil production bite, economists struggled for optimism.

“GDP figures have been pretty woeful across the region,” said William Jackson, chief emerging markets economist at Capital Economics in London. “What they have in common is a struggle to adjust to the post-boom years and to low commodity prices.”

Brazil’s contraction raised fears that Latin America’s biggest economy could return to recession less than three years after emerging from a deep downturn. The weak investment signalled increasing business scepticism about Mr Bolsonaro, who has yet to advance his bold economic reform agenda in a fractious and mostly hostile Congress.

“We don't have a recession — yet,” said Marcos Lisboa, an economist at Insper business school in São Paulo. “But the economy is more or less stopped, we have a negative first quarter, the second one walking sideways, maybe with little growth. It's a very unstable situation.”

Mr Bolsonaro hopes to turn things around by passing a reform of Brazil’s costly pensions system to cut the country’s bloated fiscal deficit. Political analysts believe the measure will pass later this year but fear it will be watered down, reducing the likely savings.

Cuts to iron ore output in the wake of a disastrous dam collapse and weak car production explained part of Brazil’s poor first quarter. The central bank now expects growth for the year of 1.2 per cent, down from an estimated 2.6 per cent in January.

In Mexico, where radical leftwing president Andres Manuel Lopez Obrador has rattled investors by cancelling a partly built new airport in the capital and pursuing the construction of a costly and contentious new oil refinery, officials insisted the future remained bright.

Alfonso Romo, Mr López Obrador’s chief of staff, believed Mexico would not sink into recession despite the first quarter contraction. “I don’t see a recession at all, zero [chance],” he said. “And I bet you 20 to 1, or 100, there won’t be a recession.”

Mr López Obrador has insisted the economy will grow by 2 per cent this year, even though most financial institutions, including the Bank of Mexico, have slashed their forecasts. The central bank on Wednesday cut its 2019 growth projection to between 0.8 and 1.8 per cent; in the fourth quarter of last year it had estimated 1.1 to 2.1 pct.

“The early economic prints of the second quarter will be key to assess if economic activity will be capable of reaching 1.5 per cent through the year. This seems unlikely,” said Mexican bank BBVA Bancomer.

Michael Stott, Andres Schipani and Jude Webber