Region: IMF downgrades regional growth, but warmer on Brazil
The International Monetary Fund (IMF) released its latest half-year update to its World Economic Outlook (WEO) on 3 October with a continuing bearish tone, downgrading its overall forecast for global growth this year and warning of continuing uncertainty in 2017.
The Fund expressed concern about the fact that “anti-integration policy platforms appear to be gaining more traction” in advanced economies, while emerging markets continue facing headwinds from still-weak commodity prices and uncertainty over China, among other things. Warning of “a generally subdued baseline for growth and substantial uncertainty about future economic prospects”, the Fund identified five main risks to its latest outlook: political discord and inward-looking policies (above all in the UK/Europe and the US); stagnation in advanced economies; the progress of China’s ongoing adjustment (from a reliance on investment, industry and exports towards greater dependence on consumption and services), plus associated spill over effects; still-uncertain financial conditions in emerging markets; and a range of additional noneconomic factors affecting various regions, from the migration crisis in the Middle East and Europe to the Zika virus in Latin America.
With regards to Latin America, the Fund was more positive towards Brazil, noting that its outlook has strengthened relative to April. It suggested that while the economy remains in recession, “activity appears to be close to bottoming out as the effects of past shocks – the decline in commodity prices, the administered-price adjustments of 2015, and political uncertainty – wear off”.
Overall however, economic activity in Latin America and the Caribbean continues to slow, and it now forecasts a contraction of 0.6% in 2016 (down by 0.1 percentage points on April). A recovery should take hold in 2017, with growth reaching 1.6% (0.1 percentage points up on April). However, the fund emphasised, as always, that aggregate regional aggregate growth “masks substantial heterogeneity”, and so while several countries remain mired in recession, “most countries in the region are continuing to expand” this year.
By country, the Fund now forecasts real annual GDP growth of -3.3% in Brazil this year, rebounding to 0.5% in 2017. This is up by about 0.5 percentage points on its forecasts for both years in April. Noting that confidence appears to have bottomed out, the Fund bases its forecast on the assumption of “declining political and policy uncertainty and the waning effects of past economic shocks”.
Meanwhile Argentina is praised for having begun “an important and much needed transition to a more consistent and sustainable economic policy framework” which has, however, “ proven costlier than envisaged” this year, with real GDP growth now projected at -1.8% in 2016 (down from -1% in April). Optimistically, the Fund says that growth can strengthen to 2.7% in 2017, on the back of moderating inflation and “more supportive monetary and fiscal policy stances”.
On Venezuela, the Fund is more pessimistic than in April, estimating that the country’s recession will deepen in 2016 and 2017 “as the decline in oil prices since mid-2014 has exacerbated domestic macroeconomic imbalances and balance of payments pressures”, it notes dryly, foregoing any reference to the political and social crisis in the country. It now projects a real GDP contraction of 10% annually this year and -4.5% next year, with an average annual inflation rate of 475% and 1,660%, respectively. These dire forecasts will inevitably provoke a strong reaction from the left-wing Caracas government, which accuses the IMF in being in cahoots with the (alleged) US-led economic war against the Socialist ‘Bolivarian Revolution’.
The also-left-leaning government of Ecuador, the Fund notes, “continues to face a challenging outlook given the reduced value of its oil exports and its dollarized economy”. However, citing the partial recovery in global oil prices and a more favourable external financing outlook, the Fund adjusted its projected contraction in activity for 2016 and 2017 to be less severe than it projected in April, at -2.3% and -2.7%, respectively; an fairly sizeable adjustment that President Rafael Correa took great delight in criticising in mid September, slamming the Fund’s forecasts as “astrology”.
According to the Fund, most of the remaining commodity exporters in the region will experience some deceleration in activity in 2016. In Colombia, growth is expected to ease to 2.2% (from 3.1% in 2015), reflecting tighter macroeconomic policies. Similarly, the protracted decline in the price of copper and policy uncertainties are weighing on Chile’s outlook, with growth declining to 1.7% in 2016, from 2.3% in 2015. In both countries, nonetheless, the Fund expects that growth will strengthen in 2017, “and gradually rise to potential thereafter”.
Unlike most of its peers, Peru is expected to grow faster this year and next, with growth rising to 3.7% and 4.1% in 2016 and 2017, respectively, “on the back of expanding activity in the mining sector and higher public investment”. Those forecasts remain a bit more moderate than Peru’s new government led by President Pedro Pablo Kuczynski, which in its draft budget for 2017 projected real annual GDP of 4% this year and 4.8% in 2017. Nonetheless Peru remains the ‘darling’ of the IMF and international investors, who remain upbeat about its near term prospects.
Finally, growth in Mexico is projected to decline to 2.1% in 2016 “due to a weak export performance in the first half”. The IMF expects a moderate acceleration to 2.3% in 2017 “as external demand recovers”, rising to 2.9% over the medium term, as the structural reforms implemented by the current government from 2013 take hold. The Fund does not allude to the ‘Trump Factor’, the concern in Mexico about the negative economic impact of a victory by the US Republican Party’s presidential candidate Donald Trump in the upcoming 8 November general election.
Western Hemisphere: Real GDP, Consumer Prices, Current Account Balance, and Unemployment
Source: IMF World Economic Outlook, October 2016

