Latin American Economic Report

Bank of Spain

On 20th October the Bank of Spain published its Latin American Economic Report for the second half of 2017 and went into depth, constructing the Taylor* rule.

According to the data in the report, the region’s main economies are enjoying a cyclical improvement, with a reduction in inflation rates and the resulting fall in official interest rates. In year-on-year terms, aggregate GDP has grown by 1.2% in the second quarter of 2017, although there are variations between the countries studied.

Private consumption in Brazil has recovered, with a parallel drop in the inflation rate, a rise in wages and a reduction in official interest rates. However, investment is still contracting, as is public consumption.

In Argentina, despite growth in internal demand, exports contracted; in Chile, economic activity improved, thanks to recovery in consumption and investment.

In Colombia, however, as a result of the drastic fall in the oil price, the economy slowed somewhat; the picture was similar in Peru, where the latest floods and the corruption scandals in which the country is embroiled have had a negative impact on public spending.

In aggregate, the conclusion is that private consumption has increased despite the rise in unemployment over the period being analyzed. The region’s inflation rate fell because of stabilizing exchange rates; the exceptions were Mexico, due to the peso’s depreciation, together with the rise in the price of gas, and Peru, where inflation remained stable. Central Banks were therefore able to cut their monetary policy rates.

In the foreign-trade sector, the paper notes that international trade has been more dynamic with the depreciation of the dollar since July. Meanwhile, in the financial markets, the best performers were the Peruvian and Brazilian securities markets.

The report focused on the Mexican situation, given the social and economic news affecting the country in the recent months. Despite the unfavorable context, 2018 looks set to enjoy growth levels similar to 2016 and 2017 (assuming a competitive currency exchange rate and timid recovery in oil prices). Nevertheless, certain risks are envisaged, such as the negative effects of the earthquakes and the corresponding cuts in public spending, volatility in asset prices because of the NAFTA renegotiation and lower private investment because of the status of relations with the United States and the uncertainty caused by forthcoming presidential and legislative elections.

Finally, in the light of this comprehensive analysis, the Bank of Spain estimates moderate growth for 2017, at 1.6% after the reverse of -0.6% the year before, and accounted for by recoveries in Argentina and Brazil that offset the slowing growth rates in Chile, Colombia, Mexico and Peru. However, these growth rates are still insufficient to make significant progress in comparison with more advanced economies.

* Rule used in monetary policy. It determines the nominal interest rate that a central bank should adopt, relative to inflation, gross domestic product and other economic variables.