Set for a slow recovery

The downturn in Latin America’s economy should bottom out over the second half of this year and economic growth should return as we move into 2017. The recession in the region’s largest economy – Brazil – is likely to ease and a combination of stable commodity prices, falling inflation and the boost to external competitiveness from previous currency falls should lead to an improvement in conditions elsewhere in the region. The resumption of Fed rate hikes could cause some volatility in financial markets but it is unlikely to have a major macroeconomic impact on the region. Interest rates are likely to move up in most countries (with the notable exception of Brazil where they should fall) but aggressive monetary tightening is unlikely. Nonetheless, while the worst of the downturn in Latin America may soon be behind us, the pace of recovery is likely to be weak. Credit conditions will remain tight in several of the region’s largest economies and governments will need to tighten fiscal policy in order to rein in budget deficits. All told, following a contraction in regional GDP of 0.5% this year, we expect only a modest pick-up in growth to 2.0% in 2017.