Brazil

BRAZIL’S economy virtually crashed last year owing to a collapse in global commodity prices, a

widening budget deficit, stubbornly high inflation and the corruption scandal at the state-controlled oil company.

Most predictions now suggest the economy will shrink by 3.9pc this year, following last year’s 3.8pc contraction, the worst in 25 years. If this happens, it would make 2015 and 2016 the first back-to-back years of contraction since the 1930s.

As Latin America’s largest economy struggles with political turmoil that is likely to obstruct policy measures needed to lift it out of the steep and lengthy downturn, the OECD expects Brazil’s recession to extend into 2017.

The country needs simplification of indirect taxes, easing of trade barriers and improved competition to revive business and consumer confidence.

The government plans to cut spending and reduce budget deficit in 2017, now at above 10pc of GDP, and expects the economy will return to growth next year after a two-year contraction. It expects GDP to expand 1.2pc in 2017 after contracting by 3.8pc this year.

The finance ministry is of the opinion, the economy may stabilise in the third-quarter and rebound by end of year as the government focuses on initiatives to boost investment, expand credit and keep jobs.

Consumer and investor confidence levels have rebounded this year from record lows. However, private-sector credit problems signal no turnaround in sight as yet with the central bank holding interest rates. The nation’s nominal budget deficit reached 10.8pc of GDP in January, its highest on record, as gross debt climbed to 67pc of GDP.

However, both, OECD and IMF forecast stagnation next year, which would mean no growth until 2018.

The slight improvement in GDP data for the first-quarter is supporting an upward revision.

However, despite the change in leadership, the economy is expected to remain in a profound recession this year. Focus Economics panelists see the economy recovering slightly and growing 0.8pc in 2017.

According to the Institute of International Finance, Brazil’s once high-flying economy is currently impaired by a political crisis. It could be another year of recession if the political situation does not improve.

Mexico

MEXICO is the second-largest economy in Latin America after Brazil. Modern Mexico is a deeply divided economy, with 122m residents, just under half the country’s population, living below the poverty line.

On the other hand, there are more than 145,000 individuals in Mexico each with a net worth over $1m. Much of the economy is in worse shape.

While the wealthiest 10pc of households earn an average of just over $33,000 a year, the next wealthiest income bracket earns less than half as much.

Data from the World Bank shows that inequality increased sharply in Mexico between 2010 and 2014 after declining for a decade. Over the last 20 years, Mexico’s per capita GDP grew at an average rate of 1pc annually as it wobbled and recovered from multiple crises.

The Mexican economy has shown impressive resilience to a global economic slowdown in recent years. Economic activity is growing at a steady pace, inflation is low and stable, and the financial system is sound. Nevertheless, the economy remains exposed to external risks.

Despite some structural reforms and a strong uptick in private consumption and credit growth, the economy is likely to be dragged down by weak external demand, low oil prices, and additional cuts to government spending.

Mexico’s central bank has cut its growth forecast for 2017 for the second time while keeping its growth forecast unchanged at between 2-3pc for this year. However, it is now sees growth of between 2.2-3.3pc for 2017 as oil prices remain low and the expected benefits from the US recovery have yet to materialise. FocusEconomics panelists forecast that economic growth in 2017 could top 3.1pc.

Mexico’s economy grew 2.8pc in the first-quarter, faster than in the same period last year; employment is at a high, inflation at a low, wages are rising, so is consumption. But the economy seems to have shifted to a lower gear in second-quarter.

A lack of traction in the manufacturing sector is partly responsible for the slowdown with no visible signs of a pick-up any time soon. Healthy consumer fundamentals—such as growing employment, rising real wages and remittances increasing at a healthy pace—continue to suggest that private consumption remained strong in second-quarter. However, the economic growth remains fragile.

Economists are of the view that weakness in global demand, financial-market turbulence and the persistent decline in oil prices presented obstacles to a faster growth rate.

Shortly after the UK decided to abandon the EU, Mexico’s Ministry announced $1.7bn in budget cuts in response to expected volatility resulting from Brexit.

The cut would be on current spending, with the objective of maintaining the government’s fiscal deficit target of 3pc of GDP this year.

According to the Institute of National Statistics, the combined effects of Mexico’s fiscal and monetary policy and weak US growth will take a toll in an economic growth that is forecast at 2.3pc for 2016 and 2pc for 2017.

The Mexican government remains committed to fiscal consolidation, reducing the fiscal deficit gradually to 2.5pc of GDP by 2018.

Published in Dawn, Business & Finance weekly, July 18th, 2016