Consumer Demand Remains Healthy in Most Economies, Except Brazil
Lower oil and commodity prices as well as changes in currency rates continue to be the main drivers of economic trends in the Americas. The weak export outlook for energy and commodities have hurt the prospects of large economies such as Brazil, which is expected to see a decline in economic output this year. Canada and Mexico, two of the leading energy exporters from the region, appear to have managed to limit the damage from lower oil revenues with higher exports of manufactured goods. They are being helped by stronger U.S. demand and weaker currencies. At the same time, the stronger dollar has adversely affected U.S.-based exporters as their products and services have become less competitive.
The outlook for domestic consumer demand remains largely positive in most countries, with few exceptions such as Brazil. U.S. retail sales, after declining due to severe weather at the beginning of this year, appear to be rebounding and consumer sentiment remains robust. Consumer demand remains fairly healthy in Canada and Mexico as well, as wage gains and increased remittances from workers abroad have lifted household incomes. In select South American countries such as Chile, Peru and Colombia, fiscal stimulus measures by the government should lift domestic consumer demand and construction activity. Central banks in several of these countries remain on hold or are likely to consider rate cuts. The U.S. Federal Reserve is not expected to announce its first rate hike until later this year. Brazil remains an exception here as well, as higher inflation could force a rate increase in the coming months.
At a Glance
United States: Economic growth likely moderated during the first quarter as difficult winter weather limited consumer and business activity. Nevertheless, the economy is expected to regain pace in the coming quarters as consumer sentiment remains robust. The labor market saw smaller job gains in March, but the unemployment rate continues to decline and wages have seen modest gains
Canada: Lower oil prices are expected to limit aggregate growth this year, as revenues from energy shipments are anticipated to decline 23 percent. However, recovery in domestic consumer demand and gains in exports of manufactured goods could limit the downside. The central bank surprised with a rate cut in January.
Brazil: The country continues to have one of the weakest economies in the region, and is expected to see a contraction this year. Exports are likely to decline on lower commodity prices, despite the falling currency. At the same time, domestic demand remains restricted due to low wage growth and higher borrowing costs.
Mexico: The downside from lower energy exports is expected to be more than offset by gains in shipments of manufactured goods and higher domestic consumer demand. The strong U.S. Dollar has also pushed up remittances. Accordingly, the economy is expected to expand at a faster pace when compared to last year.
Chile: The outlook for exports remains weak due to the fall in prices of copper and other metals. However, the fiscal and monetary measures implemented last year are likely to lift economic growth in 2015. Retail sales growth has been healthy in recent months and the trend is expected to continue.
Peru: The Peruvian economy is likely to be the fastest growing in the region, as effective fiscal measures have limited the damage from lower export revenues. Aggregate economic growth is expected to exceed 4 percent, compared to last year’s 2.4 percent.
Colombia: The country is one of the major oil exporters in Latin America, and lower oil revenues are expected to reduce the growth rate for the current year. The government has rolled out a $20 billion infrastructure investment program to lift economic growth over the next several years.
Argentina: The Argentinean economy is expected to contract this year as the political environment has also weakened recently. The government is struggling to raise debt and meet its obligations as a recent bond sale received bids for only 10 percent of the total amount offered.
UNITED STATES: ECONOMY EXPECTED TO RECOVER FROM WEATHER INDUCED SOFT PATCH
U.S. economic growth likely moderated during the first three months of the year, as harsh winter weather disrupted consumer and business activity. The weather was particularly severe on the East Coast, where some cities received record snowfall. Retail activity was subdued during the first two months of the year, before recovering in March. Industrial production trends were also uneven as there was a decline during the month of March, after growing only marginally during the previous month. However, purchasing manager surveys suggest sustained expansion, though at a moderate pace. Order flows for durables have also been healthy, and indicate further gains in industrial growth in the coming months.
Consumer sentiment remains robust as one of the widely followed surveys of consumer confidence rose to the highest level in more than seven years. Though average gasoline prices have moved higher from the lows at the beginning of the year, the labor market continues to strengthen and support consumer confidence. Though monthly job additions slowed in March, the fall in unemployment and signs of wage gains indicate that the labor market remains relatively healthy.
The sharp fall in imports has shrunk the U.S. trade deficit in recent months and should contribute positively to aggregate growth this year. The trade gap for the month of February was below estimates and the lowest in nearly five years. However, the relative strength of the dollar is likely to restrict potential export gains even if global demand improves. Exports declined more than 1.5 percent in February from a month ago, and large corporations with extensive overseas businesses now expect dollar strength to hurt their revenue and earnings growth this year.
The moderation in aggregate growth and lower job additions in March are expected to encourage the U.S. Federal Reserve to delay its anticipated rate hike until later this year. In addition, inflation remains low and consumer prices are not forecast to see significant gains this year. However, the Fed remains noncommittal and continues to maintain that its policy actions would be guided by economic data trends.
CANADA: CONSUMER DEMAND RECOVERY AND MANUFACTURED GOODS EXPORTS TO SUPPORT THE ECONOMY
While the sharp drop in oil prices is expected to limit aggregate growth in Canada this year, recovery in consumer demand could prevent further weakness. Retail sales growth rebounded in February, after two months of decline, and the gains were fairly widespread across most segments. The trend appears to have continued in March as well, when automobile sales increased nearly 2 percent. Low interest rates are among the drivers boosting consumer demand in Canada, where household spending accounts for nearly 60 percent of the economy.
Exports from Canada are expected to remain at the same level as last year, according to estimates by Export Development Canada, a federal government agency. While shipments of automobiles and other manufactured goods are expected to rise this year, the gains could be offset by the decline in oil export revenues. Energy export revenues are forecast to decline 23 percent when compared to last year, based on expected average WTI prices of $61 per barrel, the EDC said. The nearly 10 percent decline in the Canadian Dollar over the last year is expected to help exports of manufactured goods.
The Bank of Canada surprised with a rate cut in January, based on its assessment that the economy is slowing more than expected due to the oil price plunge. The central bank has turned more positive subsequently, and now expects stronger U.S. demand and the boost to consumer sentiment from the interest rate cut to help the economy by the end of this year. Annual inflation remained unchanged in March when compared to the previous month, and the central bank is expected to keep its benchmark rate steady.
BRAZIL: OUTLOOK REMAINS WEAK AS INFLATION LIMITS POLICY CHOICES
Economic conditions in Brazil deteriorated during the first quarter of this year and the country is facing the prospect of a recession in 2015. Aggregate output declined in January, continuing the trend from the previous month, as export revenues have fallen and domestic demand remains restricted. Retail sales slipped more than 3 percent in February, after registering marginal growth during the previous month. The labor market remains weak as the economy lost jobs during the first two months of this year, before reporting moderate gains in March. If this trend is sustained, more pressure on domestic demand growth is likely in the coming months.
Exports from Brazil remain subdued as prices of most commodities continue to be weak on lower demand from China and other emerging markets. However, the country has tried to offset some of the revenue decline with higher export volumes. Brazil, the second largest exporter of iron ore, saw strong growth in shipped volumes of iron ore during the initial months of this year. The sharp decline in the Brazilian currency against the U.S. Dollar is also helping exports from the country. However, a major strike by truckers disrupted the movement of goods in February and could limit exports for the first quarter even further.
Despite the weak economic trends, Brazil’s central bank is struggling to reduce interest rates as inflation risks remain elevated. Annual inflation has accelerated to above 8 percent recently, more than the 6.5 percent upper end of the central bank’s target range. The central bank has held its benchmark rate unchanged this year, and it is expected that higher inflation could force a rate hike in the coming months. Economists surveyed by the central bank expect the economy to contract nearly 1 percent this year, compared to the marginal 0.1 percent growth achieved for 2014.
MEXICO: DOMESTIC CONSUMPTION GROWTH AND HEALTHY EXPORT DEMAND TO HELP GROWTH THIS YEAR
Despite lower oil prices, the outlook for the Mexican economy has improved on healthier U.S. demand as well as domestic spending. Retail sales growth for the months of February and March were above expectations, as healthy job additions and wage gains have kept consumer demand buoyant. The stronger U.S. Dollar has led to higher remittances into the country from Mexicans working abroad, boosting household spending power. Consumer confidence has also received a lift from falling inflation in recent months. The Mexican central bank expects the economy to expand between 2.5 percent and 3.5 percent this year, compared to 2.1 percent for 2014.
Healthier U.S. consumer demand and the weaker currency have been driving exports from Mexico, and further gains are expected in the coming quarters. Exports of automobiles increased more than 25 percent during the last quarter of 2014, and aggregate exports are anticipated to rise to a record 2.9 million units this year, according to an industry organization. 70 percent to 80 percent of exports are destined for the U.S., where demand for cars remains robust. Mexico is also one of the leading manufacturers of automobile parts globally. Though export data for the months of January and March were softer than expected, mostly due to the weather related slowdown in U.S. demand, shipments are projected to increase in the coming months.
However, weak oil prices could limit export gains and reduce capital investments as well as industrial growth. Oil production has been declining steadily over the last decade and the government expects output to fall to 2.3 million barrels a day this year, before recovering to 2.4 million barrels per day in 2016. The Mexican government, which follows a policy of hedging its output in advance, has budgeted an average price of $50 per barrel this year and $55 per barrel for 2016.
CHILE: HIGHER DOMESTIC DEMAND LIFTS OUTLOOK FOR 2015
After the substantial fall in growth rate to 1.9 percent last year, from 4.2 percent in 2013, the Chilean economy has seen signs of a moderate rebound in the initial months of this year. Trends from the monthly survey of economic activity suggest that aggregate growth was close to 2.5 percent during the first two months of 2015. The recovery is being helped by a sharp increase in government spending, part of the additional fiscal stimulus measures announced last year. Mining output growth also exceeded expectations at the beginning of this year.
The central bank’s successive interest rate cuts since the last quarter of 2013 are also helping the economy. The benchmark rate has been left unchanged since the beginning of this year but it is expected that rates are likely to come down further later this year. Lower fuel prices have pulled down inflation in recent months, but remains close to the upper end of the central bank’s target range. The central bank now expects GDP growth to fall between 2.5 percent and 3.5 percent this year.
The fiscal and monetary stimulus measures implemented over the last year continue to support domestic demand growth. Retail sales in February expanded at the fastest pace in nearly a year, continuing the trend from the last quarter of 2014. The labor market has also tightened further in recent months, as unemployment has declined and wage growth has accelerated. If these trends are sustained, it is likely that domestic demand could see further gains later this year and drive economic growth.
PERU: FISCAL STIMULUS TO HELP MAINTAIN STATUS OF THE REGION’S FASTEST GROWING ECONOMY
Weak international commodity prices continue to cloud the outlook for the Peruvian economy, though the recent fiscal measures could limit further downside. The government and the central bank expect current year economic growth to be slightly above 4 percent, an improvement from last year’s 2.4 percent. Though the country is likely to remain the fastest growing economy in South America, the pace of growth is well below the annual average of over 6 percent over the last decade. The primary reason for the slowdown is the fall in prices of copper, zinc and other metals that constitute the bulk of the country’s exports.
To revive the economy, the government is rolling out a large fiscal stimulus package that aims to boost economic activity over the next several years. In addition to lower taxes and other policy changes, new investments in infrastructure projects are expected to exceed $30 billion. Investments in increasing mining capacity are likely to boost output of copper, zinc and iron ore, though production of gold is expected to decline further. Much of the stimulus program is scheduled for this year, with budgeted new government spending of over 1.5 percent of GDP.
After the surprise cut in January, the central bank has held its benchmark rate unchanged in subsequent months. Though the growth outlook is subdued, the central bank is concerned about further currency weakness if interest rates are lowered again. A moderate increase in inflation is also making the central bank cautious, especially when the government’s fiscal stimulus could increase inflation risks. Annual inflation in March was marginally above the central bank’s target of 3 percent..
COLOMBIA: GROWTH OUTLOOK MODERATES ON LOWER EXPORT REVENUES
Though Colombia is expected to remain one of the fastest growing economies in the region, the aggregate growth rate for the current year is likely to moderate when compared to 2014. Most of the slowdown is due to reduced exports of energy and other commodities, which have seen significant price corrections. Colombia ended 2014 with the first annual trade deficit in nearly seven years, as the price realization for oil exports dropped sharply while shipments of gold and other mining exports declined. The subdued trends have persisted during the initial months of this year, though the moderate recovery in oil prices could reduce the trade gap in the coming months.
To reduce the reliance on energy and commodity exports, the Colombian government has started initiatives to boost non-traditional exports in the coming years. The government has actively pursued trade agreements with other countries in recent years, and these pacts should help the country gain access to more overseas markets. The government has also announced specific measures, such as lower export duties, and has reduced administrative delays in clearing shipments, to boost exports. Over the next four years, Colombia targets to double its export revenues from goods other than oil and commodities, from less than $15 billion in 2014.
The Colombian government is also implementing a large $20 billion initiative to boost the country’s transportation infrastructure. This additional spending helped the construction sector to achieve growth of close to 10 percent last year, and further gains are expected this year. The central bank has left policy rates unchanged this year, but expects inflation to decline this year. The Colombian economy is forecast to expand by 3.5 percent this year, when compared to 2014.
ARGENTINA: ECONOMY EXPECTED TO DECLINE IN 2015
The outlook for the Argentinean economy remains weak as exports continue to decline and the political environment remains volatile. The country’s economy expanded a marginal 0.5 percent in 2014, according to government statistics, though most private economists estimate that output contracted during the year. For the current year, though the government remains optimistic, the International Monetary Fund expects a decline of 1.5 percent.
The current Argentinean government remains unpopular due to high inflation when the economy is in a decline. There were large demonstrations by labor unions in March after the government turned down a demand to reduce income taxes. The country’s manufacturing sector has also seen a fall in output, due to weak internal and external demand. Shipment of goods to other countries in the region such as Brazil, Argentina’s major trade partner, has declined as their economies have also slowed down.
Argentina is also facing difficulty in issuing debt as the international markets are effectively closed to the country after last year’s technical default. The government is currently trying to issue bonds regulated by domestic laws, but investors remain cautious. Demand for an offering of long-term bonds in December was very low, attracting bids for only about 10 percent of the $3 billion offered.
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