Pioneer’s Head of Global Asset Allocation Research, Monica Defend, along with U.S. and Latin America Global Asset Allocation Research Economist, Annalisa Usardi, recently released an economic update on the Emerging Markets. Highlights from their report surrounding Latin America, specifically Brazil and Mexico, are below. To read the full report, click here.
Growth and Inflation
We remain gloomy about the forecast for this year’s growth in Brazil. While Q1 GDP confirmed the continued slowdown in the economy that expanded in real terms only 0.2% quarter-over-quarter (QoQ) and 1.9% year-over-year (YoY), higher frequency activity indicators point to continued weakness. Confidence indicators remain weak as well. Going forward, some deceleration in the labor market could trigger a worsening trend in consumer expectations, in addition to a deceleration in credit growth and high consumer debt levels. Inflation is currently above the Central Bank’s target level and at the ceiling of the tolerance bands (4.5% +/- 2%).
According to the July 25th statement released on the BCB website, the Central Bank is making available approximately 45 billion (bn) Real (USD 20.2bn) by introducing some macro-prudential rules aimed at unclogging the credit channel. Banks are now allowed to use up to 50% of their reserve requirements (estimated 30 bn Real), to originate new loans or to buy loan portfolios. The monetary authority also eased some constraints on consumer credit by changing the risk calculations for payroll, auto loans and consumer financing in general, by reducing capital requirements as consumers repay their debts. The low growth-high inflation mix represents a difficult dilemma for the BCB: while the Monetary Policy Committee (COPOM) is trying to target the deceleration in economic activity with these credit measures, it is also reinforcing the message that no rate cuts are on the horizon. We believe a risk that if such easing measures were to succeed, they might have some inflationary consequence as well.
Mexican growth has been slow to recover and accelerate in past quarters, posting in Q1 a modest 0.3% QoQ growth (1.8% YoY, 0.1% in 4Q13) on the basis of very weak internal demand. Private Consumption and Gross Fixed Capital Formation failed to accelerate and Government Consumption also disappointed. Based on this disappointment and weak readings for the Global Economic Activity Index (IGAE) GDP proxy, the Mexican Central Bank in May cut its growth expectations for 2014 from the 3% – 4% range to 2.3% – 3.3%; then, surprisingly cut rate by 50 basis points (bps) in its June meeting, bringing the primary interest rate to 3%.
After recovering in April to positive territory, the IGAE monthly GDP proxy moved back to the negative range in May, highlighting mixed signals for 2Q14. The trend in weak consumption demand appears to be partially reversed in 2Q by recovering retail sales. Consumer Confidence Index increased marginally in June, signaling a possible reversion in the trend. All in all, these are some limited positive signals for household consumption going forward and this makes us mildly optimistic about an acceleration in the second half of the year.
On the inflation side, Consumer Price Index (CPI) data was lower than expected, with CPI increasing 0.17% month-over-month (MoM) in June (up from -0.32% MoM in May) and 3.75% YoY (up from 3.51% in May). CPI Core was up 0.21% MoM (up from 0.09% in May). Also the bi-weekly figures surprised marginally on the downside, with the data referring to the June 30th posting a 3.80% YoY reading for the bi-weekly CPI (up from 3.71% of previous reading).
Based on the weak economic data, the Mexican Central Bank in May first cut its growth expectations for 2014 from the 3% – 4% range to 2.3% – 3.3%; then, surprisingly cut interest rates by 50bps in its June 6th meeting, bringing the overnight rate to 3%. Justifying this move, several factors were cited: the weak 1Q GDP, the weak GDP monthly proxy and the weak 1Q U.S. GDP and the inflation rate (which is not supposed to accelerate this year given the weak growth prospects). In July’s meeting, Banxico left the overnight rate unchanged. We do not see Banxico affecting other rate cuts this year as mentioned in their comments – yet, if the economy were to further deteriorate, possible supportive action could not be ruled out.