Slugging Along, with Few Hopes for 2018
Q2 GDP growth figures clearly showed a weak economy, struggling to reach a mere 1.3% growth. Key indicators released since then show that the economy is still underwater – but also that it’s giving off nascent signs of recovery.
The Industrial Confidence Index, after almost a semester of decline, has been recovering since June, though in July it was stable, and is still at its lowest level in five years. The numbers suggest that manufacturing will perform better, and contribute to a higher, though still weak, growth rate.
Retail trade performance is improving, compared to the 0.9% growth of Q2. Growth in July reached a good 3.1% that, combined with continued improvement of the consumer confidence index, also forecasts better performance for this sector in Q3. Yet CCI is at its lowest point in eight years (at -9.5%).
We expect the economy to grow by nearly 2% in Q3. While a big improvement from the 1.2% of H1, this still puts our forecast for the year at a very poor 1.5%-1.7%. There’s a larger issue: Given the still-weak state of the economy, combined with expected fiscal policy, and a deficit of close to 4% this year and next, it’s tough to expect sustainable recovery in 2018.
What direction will monetary policy take? The Board of Directors is now more “dovish.” So, no matter what, we should expect cuts in the intervention interest rate soon. We expect the rate to fall to 4.75%-5% (more likely around 5%, from the current 5.25%), and then to stabilize, before being upset again next year. We expect inflation to be slightly above target, at around 4.3%, at the end of 2017.
Across Latin America, presidential candidates are presenting themselves as corruption fighters. That’s very good, because finally the anti-corruption agenda will dominate elections and presidential agendas. But do voters really think this is the most important issue, beyond some other critical issues, such as the economic effects of the negative commodities’ shock; or inequality, unemployment, lack of investment opportunities and growth? We think corruption scandals will have a hard time rising to the top of the list. Voters tend to think professional politicians get their hands dirty at some point, whether to clean up a mess or because they are just dirty. So, differentiating the clean politicians from the dirty is tricky. There’s also too much information circulating, obfuscating people’s judgment. The anti-corruption agenda may dominate the campaigns, but it’s fair to asked whether such tactics will fool people.
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