Domestic markets will lead the recovery of Latin American economies

In globally integrated markets, international prices affect local prices. The reduction in agricultural prices produced by the subsidies in the United States and in the European Union, cause the prices of local agriculture to also fall. So even farmers who do not export – and who only sell their produce in domestic markets – are affected.”

Joseph E. Stiglitz

The results of the third quarter showed the success that services had over the Latin American economies. The activity data in the six largest economies in Latin America (Argentina, Brazil, Chile, Colombia, Mexico and Peru), were better than expected.

A month ago, we expected the economies of Mexico, Colombia and Argentina to decline in Q3, but growth surprises in July and August led us to raise our forecast. With the exception of Brazil, whose GDP contracted in August, we view Chile’s GDP as falling during the third quarter as the economy cooled from its earlier overheating.

The biggest surprise came from Colombia, where economic activity in August grew 1.4%, Argentina’s grew 0.4%, Peru’s also surprised on the upside, although the general outlook for the third quarter deteriorated due to data revisions of the second quarter, and the ongoing strikes in the mining sectors.

In Mexico, preliminary activity data from INEGI for September point to a slowdown during Q3. A stronger-than-expected boost in services, which offset the slowdown in manufacturing activity. We believe activity in Chile and Peru contracted in the third quarter, but monthly data suggests expansion for the region as a whole.

Activity in the third quarter was better than expected in all countries except Brazil, although we expect a generalized contraction for the last quarter. In addition to internal obstacles, the global economic slowdown and persistent geopolitical tensions will affect economic activity in the region in 2023.

Activity data for the six largest economies in Latin America (Argentina, Brazil, Chile, Colombia, Mexico and Peru), were better than expected during the third quarter.

In short, in Brazil, Colombia, Mexico and Chile, the greater boost in services offset the slowdown in manufacturing. Services benefited from broad-based strong trade growth, which contradicted our earlier forecast that high inflation and rising interest rates would weigh on consumption in the third quarter.

In addition, high-touch services have not yet fully recovered to their pre-pandemic levels of production, with the rebound in global tourism aiding the recovery.

Overall services activity recovered to pre-pandemic production levels during the second half of 2021 in all countries except Mexico, where the tourism sector and a ban on outsourcing limited its recovery.

Inflation expectations may have advanced consumption decisions, although we believe that this slowed down during the third quarter. While job growth, and food and energy price subsidies, have limited the impact on consumer purchasing power, though risks to our growth outlook for 2023 remain tilted to the downside.