Latin America: Downgraded Growth Outlook

Consensus Forecasts

Brazil was hit by a wave of protests last month as thousands of demonstrators took to the streets to air their grievances about a range of social and economic issues. What started off in early June as a series of demonstrations in Sao Paulo and Rio de Janeiro against an increase in bus fares, quickly spread to other cities as more people joined the movement. The protests illustrate the public’s growing discontent with the political leadership and were used as a platform to voice anger over rising inflation, corruption, poor public services and overspending by the government on next year’s World Cup tournament. Following a week of protests, the governments of Sao Paulo and Rio de Janeiro reversed the planned fare hikes. However, recent events have undermined the government’s credibility, while uncertainty over how policymakers will respond will inevitably hurt the economy. The government is already grappling with slowing activity, and greater volatility in the growth outlook will undoubtedly hit confidence and undermine the much-needed recovery in investment growth. With the risk to growth on the downside, consensus GDP expectations have slipped this month.

Banco de México kept its key rate unchanged at 4.0% on July 12 on the back of easing inflation and downside risks to domestic and global activity. After peaking at 4.6% (y-o-y) in April and May, the June CPI slipped to 4.1%, reined in by a 0.1% (m-o-m) fall in prices. The central bank remains vigilant of peso depreciation in the wake of the Fed’s policy shift, though. Meanwhile, April’s economic activity indicator jumped by 4.6% (y-o-y) – due to favourable base effects – but declined by 0.8% in seasonally-adjusted m-o-m terms. Elsewhere, manufacturing production rose by 2.2% (y-o-y) in May although this was down from 5.7% in April. Strength in global auto sales helped to keep manufacturing afloat, but the May figures belie uncertainty in the sector owing to weakness in US industry and demand. IMEF’s forward-looking PMI showed a further slide into contraction in June, and our panel’s 2013 production forecast has subsequently dropped.

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