Analysis: Mexico and Brazil, Latin America’s powerhouses, with the lowest growth in the region

In a complicated environment characterized by monetary tightening, high inflation, and a global economic slowdown, the Latin American powerhouses of Brazil and Mexico are the economies with the lowest growth prospects for 2022.

This is despite the recovery of tourist flows and the decline in the impact of the pandemic, in addition to the benefits that exports can achieve due to high commodity prices.

According to FocusEconomics, Mexico’s gross domestic product (GDP) will finish this year at an annual rate of 1.9%, while Brazil’s increase would be around 2%; just yesterday, BoA raised its forecast to 2.5%, however.

Another Latin American economy that is not optimistic for 2022 is Paraguay, with a forecast of 0.4%; the countries with the best predictions are Venezuela, with an increase of 10.1%, and Colombia, with 5.8%. Both countries have a “rebound” effect and lower inflation.

THE CONCENTRATION OF MEXICO AND BRAZIL

However, the largest economies are Brazil and Mexico, which account for 57% of Latin American GDP, setting the trend in the region.

For Mexico, the factors affecting the slowdown of its economy are the acceleration of inflation, the tightening of its monetary policy with high-interest rates, the recessionary phase of the United States, and the political uncertainty that affects investment.

“On the positive side, higher oil prices will boost export revenues, and services will benefit from the reduced impact of the pandemic. But supply chain disruptions, a potential recession in the U.S., and unpredictable policy decisions pose risks,” the consultancy warns in its Focus report.

REGIONAL INFLATION IN DOUBLE DIGITS

Focus Economics notes that regional inflation reached 15.6% year-on-year in June, mainly due to weaker currencies, with expectations of double-digit inflation despite higher interest rates and government subsidies.

The following risks are foreseen for the end of 2022: Exchange rate depreciation, extreme weather events, commodity price volatility, and possible additional subsidies.

Inflation in Mexico was 8.15% in July, the highest in more than 21 years, forcing the central bank to raise the key interest rate to 8.50%. The drought in the country and the expansion of the Russian invasion in Ukraine are presented as the main risks.

WEAKENED PERFORMANCE

In Brazil, the unchallenged Latin American powerhouse, the somewhat mixed growth forecast for 2022 is mainly due to increased public spending ahead of next October’s presidential election and uncertainty over the fiscal situation.

Brazil’s annual inflation rate rose to 10.07% in June, while the monetary policy rate reached 13.75%. However, recent developments point to a deflationary trend, which Brazil is one of the first countries in the world to experience.

FocusEconomics panelists believe that the government’s anti-inflation measures, a contractionary monetary policy stance, and a more robust real should pave the way for easing price pressures.

VENEZUELA, A SPECIAL CASE

Venezuela is a particular case in Latin America. FocusEconomics forecasts GDP growth of 10.1% this year, the highest in the region.

The reasons for this increase are a rebound effect due to the previous years of recession, the rise in oil production, which, together with high oil prices, has increased government revenues, and a slowdown in inflation, which has boosted private consumption.

Another important point highlighted by the consulting firm is that the government enacted the Organic Law for Special Economic Zones in mid-July, which aims to promote growth and decouple the economy from dependence on oil.

It is worth noting that annual inflation in Venezuela, although the highest in the region, has fallen from 222% in April to 167% in May, the lowest rate since October 2015. A latent risk, as in Latin America, is the pass-through of high international commodity prices.