by domestic demand Juan Ruiz BBVA Research Chief Economist for - PowerPoint PPT Presentation

Latin America: growth held back by domestic demand Juan Ruiz BBVA Research │ Chief Economist for Latin America Latin America Economic Outlook – 2T15 │ Madrid, 2 June2015

Latin America Economic Outlook / May 2015 Key messages The growth in the global economy continues, but growth is weaker and more uneven. 1 China continues to decelerate in a controlled manner, and US economic policy is preparing for a hike in interest rates, which will increase market volatility. We are revising LatAm growth downwards to 0.6% in 2015 and 2.1% in 2016. The 2 weakness of confidence is hampering domestic demand, but regional growth will rise in 2016, spurred by a concerted public investment effort in the Andean countries and greater world growth. The Pacific Alliance will continue to grow at above the regional average. The recession in Brazil will produce spill-over, primarily into Argentina, Uruguay and 3 Paraguay , although the impact will be very marginal in the other countries. Inflation is holding at a level above previous forecasts in those countries with inflation 4 targets, partly due to the exchange-rate depreciation, yet also because of other, idiosyncratic, factors. Even so, it will converge towards central bank targets in 2015-16. The window for monetary stimulus in the Andean countries is closing due to inflation 5 shocks (and exchange-rate volatility in Peru). Interest rates should hold steady in 2015 in the Andean countries, whereas we expect Brazil to raise the Selic by a further 50bp and Mexico will shadow the Fed very closely. Page 2

Latin America Economic Outlook / May 2015 Outline Global economy: weaker and more uneven world growth 1 LatAm: growth is flagging, dragged by domestic demand 2 Page 3

Latin America Economic Outlook / May 2015 A less convincing and more uneven global recovery Spain US Eurozone Eagles China 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 1.6 2.2 3.0 2.7 2.9 2.8 4.9 6.6 5.3 7.0 Latin America World Emerging Asia 2015 2016 2015 2016 2015 2016 2.1 3.5 3.9 6.8 6.7 0.6 See : https://www.bbvaresearch.com/public-compuesta/situacion-global-segundo-trimestre-2015// Down Steady UP Source: BBVA Research Page 4

Latin America Economic Outlook / May 2015 A less convincing and more uneven global recovery BBVA-GAIN world growth indicator (% by quarter) Source: BBVA Research In Europe the improvement in activity intensifies 2.8% annualized Growth loses momentum in EMs The deceleration in the US will be transitory IC al 20% IC al 4 0% IC al 6 0% PIB (% T/T) Page 5

Latin America Economic Outlook / May 2015 China: the gradually decelerating trend in activity continues China: GDP growth (%) Forecast 2015-16 Source: BBVA Research 9.0 7.7 8.0 7.4 7.0 7.0 6.6 Deceleration as a reflection of the real estate correction and fiscal consolidation in local 6.0 government 5.0 4.0 3.0 Objective of 7% growth in 2015 will set in motion new fiscal and monetary stimulus 2.0 measures 1.0 0.0 2013 2014 2015 2016 may-15 feb-15 Page 6

Latin America Economic Outlook / May 2015 US: a transitory deceleration in the first quarter US: GDP growth (quarterly annualized rate) Source: BBVA Research and Haver Employment rising and inflation falling support household income and consumption This will offset dollar appreciation and the weakness in external demand Page 7

Latin America Economic Outlook / May 2015 Monetary policy differentiation between the US and the rest of the world Interest Rate expectations (%, expectations one year forward) Source: BBVA Research, Haver Analytics 0,75 0,60 Since January 2015, central banks have taken 27 decisions to lower interest rates and only 0,45 two to raise them 0,30 0,15 0,00 Recent volatility associated with the change in the likely timing for the Fed’s hike cycle -0,15 -0,30 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 FED BCE Page 8

Latin America Economic Outlook / May 2015 Commodity prices are recovering slightly, but remain subdued Soy: (USD/tm) Copper: (USD/lb) Brent: (USD/b) Source: BBVA Research and Bloomberg Source: BBVA Research and Bloomberg Source: BBVA Research and Bloomberg 4,5 650 120 600 4,0 100 550 3,5 500 80 450 3,0 400 60 2,5 350 300 40 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Sep-18 2,0 Mar-10 Oct-10 May-11 Dec-11 Jul-12 Feb-13 Sep-13 Apr-14 Nov-14 Jun-15 Jan-16 Aug-16 Mar-17 Oct-17 May-18 Dec-18 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Sep-18 Jan-15 may-15 Jan-15 may-15 Jan-15 may-15 … for fundamental supply reasons, as well as Oil and copper prices increased slightly in the last quarter … dollar weakness in recent weeks Page 9

Latin America Economic Outlook / May 2015 What are the global risks? Europe Greece China Global Sharp adjustment geopolitics in activity Middle East, Russia-Ukraine EMs Impact of Fed normalisation Risk is increasing Risk continues Source: BBVA Research Page 10

Latin America Economic Outlook / May 2015 Outline Global economy: weaker and more uneven world growth 1 LatAm: growth is flagging, dragged by domestic demand 2 Page 11

Latin America Economic Outlook / May 2015 Volatility continued to prey on financial markets in the region, being swayed by the Fed Prices of the main assets in LatAm (index May 2013=100) Precios de los principales activos en Latam Volatility remained high among the region’s (índice mayo 2013=100) key assets, with corrections in stock markets, Source: BBVA Research and Haver sovereign spreads and exchange rates over the first quarter …. … until the prospect of a delay to the first rate hike by the Fed restored market prices Going forward, volatility will continue as US macro data prompts shifting expectations over Fed rate hikes Page 12

Latin America Economic Outlook / May 2015 Confidence indicator weakness across the board Latam: Household and Business Confidence indexes. Source: BBVA Research and Haver Confidence in the region has been battered by political turbulence in some countries … Optimism … though also by the uncertainty over economic policies... Pessimism … and on top of all this there is the cyclical decline itself, as well as the gloomier external scenario, which impacts disposable income and investment returns Page 13

Latin America Economic Outlook / May 2015 We are revising forecasts for Latin America downwards to 0.6% in 2015 and 2.1% in 2016 Latam*: GDP growth (%YoY) Source: BBVA Research Activity figures surprised on the low side in 4Q14 and 1Q15 Weak private sector consumption and investment, held back by waning household and business confidence Falls in public spending in some major economies in the region (BRA, MEX, COL and PER) Increased growth in 2016 due to: i) momentum of world growth, ii) public-sector investment in the Andean countries, and iii) less macro adjustment in Brazil * Average of Argentina, Brasil, Chile, Colombia, México, Paraguay, Perú, México, Uruguay y Venezuela Page 14

Latin America Economic Outlook / May 2015 [Box 1] The impact of recession in Brazil will be more keenly felt in Argentina, Uruguay and Paraguay Latam countries: Exports to Brazil (% of GDP for each country) The bigger-than-anticipated impact of Soruce: BBVA Research macroeconomic policy adjustment in Brazil will lead to a recession in 2015 (-0.7%) 5.0% Argentina, Uruguay and Paraguay stand 4.0% out in all potential channels for any spill- over effect … 3.0% … which include: i) goods trade, ii) tourism, iii) FDI, iv) Brazilian interests in local 2.0% banking 1.0% The other countries in the region should only suffer a very small amount of contagion 0.0% ARG CHI COL MEX PAR PER URU 1997-2002 2003-2008 2009-2013 Page 15

Latin America Economic Outlook / May 2015 The downward revisions for growth in 2015 centres on Brazil, Mexico and Peru LatAm countries: GDP growth (%) The downward revisions to forecasts affect Source: BBVA Research almost all countries except for Paraguay Brazil: macroeconomic adjustment Mexico: weak US growth and lower public spending Peru: low confidence and delay in public investment In stark contrast: the Pacific Alliance will grow at 3% in 2015-16, above the regional average Page 16

Latin America Economic Outlook / May 2015 Inflation increased in the region, but it will move back towards central bank targets in 2015-16 LatAm: inflation (%YoY) in countrees with inflation targets Source: BBVA Research y Haver … but idiosyncratic factors are also very Currency depreciation has been one of the significant (taxation, food shocks, rises in factors pushing up inflation … administered prices, etc.) Page 17

Latin America Economic Outlook / May 2015 The window of opportunity is closing for rate cuts, in spite of the cyclical weakness Official interest rate in countries with inflation targets (%) Source: BBVA Research and Haver Rather than rate cuts in the Andean countries we Brazil will raise the Selic rate by another 50bp, predict stability up to 2016 while Mexico will fall into step with Fed hikes Page 18