Regional growth to improve as Brazil exits recession

The downturn in Latin America is starting to bottom out and growth should return as we enter 2017. The region’s largest economy – Brazil – is turning the corner and our growth forecasts for the next year are a bit above consensus. Likewise, we expect growth in Mexico, Colombia, Peru and Chile to edge up over the course of 2017-18. While we expect interest rate hikes in Mexico as inflation rises further, price pressures should moderate in most places, meaning interest rate tightening cycles do not have much further to run. And in Brazil and Colombia, interest rates are likely to be lowered. Balance of payments vulnerabilities have started to diminish, meaning that currencies should remain broadly stable. Admittedly, credit conditions will remain tight in several of the region’s largest economies and governments still need to tighten fiscal policy in order to rein in budget deficits. These will pose substantial headwinds to the recovery. Potential growth has also slipped. But having contracted by 0.5% this year, we expect regional GDP to grow by 1.8% in 2017 and 2.0% in 2018.