There was a notable improvement in economic conditions in Latin America since the last issue, as the pandemic receded and vaccine access increased. GDP growth forecasts were revised up, while unemployment rates continued to trend downwards. The release of some pent-up demand as COVID-19 restrictions were lifted boosted manufacturing production and hiring in Colombia and Brazil during the third quarter, according to PMI data, and the downturn in Mexico continued to ease.
While the IMF full-year forecast for emerging markets and developing economies was revised down in July, an upgrade was reported for Latin America somewhat owing to betterthan-anticipated growth in Brazil and Mexico.
Although growth prospects remain bright, the region faces many headwinds. Inflationary pressures continued to mount, largely attributable to supply-chain disruptions and constrained freight availability. As increases in input costs feed through to final prices for goods and services, consumption could fall. Monetary policy tightening was evident in Brazil, Colombia and Mexico, which could curtail investment in the coming months due to rising borrowing costs. Also, the recovery from the pandemic could be derailed should there be new strains of the virus and additional waves of contamination.
In July, the IMF revised higher its forecast for Brazilian economic growth for 2021 as a whole, from +3.7% in April to +5.3%, thanks to a stronger-than-predicted expansion in the first half of the year. In Q2 2021, GDP was up +12.4% on an annual basis and only fractionally below the pre-pandemic peak. At the same time, the fund downgraded the 2022 GDP forecast, from +2.6% to +1.9%.
PMI data for Brazil corroborate views that economic conditions have improved. The quarterly average of the Composite Output Index continued to strengthen in Q3 as both the manufacturing and service sectors remained firmly in expansion mode. Private sector companies saw their order books rise on a monthly basis throughout the third quarter, as COVID-19 concerns among households and firms diminished in line with growing vaccine coverage and the retreat of the pandemic. The upturn in demand supported further increases in output and employment.
Official labour market statistics, available up until July, showed the lowest unemployment rate (13.7%) since mid-2020, and the strong PMI employment readings coupled with a marked improvement in business confidence suggest that more jobs will be created in the near-term.
Inflation remains a key concern among PMI survey participants. In September, aggregate rates of increase in both input costs and output charges climbed to new records as a result of lingering input shortages, currency weakness and water shortages. The central bank continued with its aggressive tightening in September in order to tame inflation, and hinted at a further hike at the end of October. The SELIC was raised by another 100bp, to stand at 6.25% as official inflation (9.68% in August) moved further away from the central target of 3.75%.
The third quarter saw a substantial improvement in manufacturing conditions across Colombia as the sector started to recover from disruptions caused by national strikes, blockades and a new wave of COVID-19 infections. Demand growth was restored and factories scaled up production volumes throughout Q3. Firms also lifted input buying amid restocking efforts, and more jobs were created.
Indeed, official statistics showed tentative signs of a recovery in the labour market, as the unemployment rate declined in each month since June. At 12.3% in August, the latest figure was the lowest since the onset of COVID-19.
Supply-chain imbalances, peso weakness and higher oil prices continued to lead to inflation
In view of the challenges the country faced in the second quarter, GDP declined from Q1. However, considering the low base of 2020, annual growth hit 17%. The PMI data signalled a sizeable rebound in the third quarter. In the April World Economic Outlook update, the IMF forecast GDP growth of +5.2% for 2021. This was upgraded from +4.6% in January and is expected to be revised higher when the database is refreshed later in October.
Supply-chain imbalances, peso weakness and higher oil prices continued to lead to inflation, with survey data showing near-record rates of increase in both input costs and output charges across the manufacturing industry in September. With official inflation (4.4% in August) exceeding the upper-limit target, the central bank raised the benchmark interest rate for the first time since 2016 during October to 2% and further hikes are expected in the coming months.
Inflationary pressures in Mexico also lingered. While the CPI eased to 5.6% in August, it remained above the central bank’s upper limit target of 4%. Although Banxico expects shocks impacting prices to be transitory, rising inflation expectations led them to further lift the policy rate in September. At 4.75%, the benchmark rate was at its highest since July 2020.
Manufacturers on the PMI panel noted that raw material shortages continued to push-up cost burdens in September, though inflation eased to an eight-month low. Input scarcity damaged other areas of the manufacturing industry, restricting purchasing activity, dragging down inventories and curbing production. That said, the PMI average for the third quarter was the best since the COVID-19 outbreak.
Despite rising on a quarterly basis from Q3 2020 through to Q2 2021, GDP remains below pre-pandemic levels. The recovery is expected to continue, however, with the IMF upgrading both its 2021 (+6.3%) and 2022 (+4.2%) GDP forecasts for the country owing to vaccine progress and strengthening economic growth in the US. The pandemic remains the key downside risk to the outlook.