Brazil Drags Down Latin America Outlook
Despite the ongoing solid performance of Mexico's manufacturing industry, our Latin America Manufacturing Index is expected to decline 0.9% in 2015, according to our latest estimates in the Latin America Manufacturing Outlook. A deepening recession in Brazil is the culprit for our dim regional forecast this year.
In an attempt to fight rising inflation and restore public finances—that would maintain the country’s investment grade status—Brazil’s economic team led by Minister Joaquim Levy cut spending and tightened monetary policy. As a result, the economy weakened and the recession is deepening as I write these lines. To make matters worse, the government recently admitted that their fiscal targets will not be met in the foreseeable future given the lower revenues that are a byproduct of the larger than expected economic recession. Most credit rating agencies have warned about downgrading Brazil’s rating, which will complicate things even more. Brazil’s manufacturing—which has been stagnant for the past four years—is expected to decrease output 3.8% this year, according to our estimates. And I have to admit that the recent revision to the fiscal objectives are already putting downward pressure on our 2016 manufacturing outlook, which points to 0.7% growth.
Manufacturing in Mexico remains in decent shape, despite the latest doubts about the U.S. outlook. Carmakers lead the growth tables and are stimulating activity across intermediate industries. We have been suggesting that broader-based industrial growth was in the works and it has finally materialized. In Argentina, a mild manufacturing recession is a result of a weaker Brazil and the country’s self-inflicted wounds. Limitations on imports of all sorts of goods, capital restrictions, high inflation, muted domestic demand, and the pre-election uncertainty are clearly affecting activity.
For 2016, we forecast that our Latin America manufacturing index will expand 1.9%. However, the recent events in Brazil discussed above and the rising risks of a post-election adjustment in Argentina may prove our estimates to be too optimistic.