Latin America: Positive Growth Dynamics but Deteriorating Inflation Expectations
Mexico’s industrial production in December surprised to the upside indicating that positive momentum is likely to remain strong at the beginning of this year. Central bank consensus reports from Colombia, Chile and Peru showed that inflation expectations for 2010 deteriorated but they remain within the central banks’ target ranges. Chile and Peru’s central bank surveys showed upward revisions in growth forecasts.
In Mexico, industrial production expanded 1.6% y/y in December 2009, meaning that the industrial sector contracted 2% y/y in Q4 2009 and 7.3% y/y in 2009 (-0.6% in 2008), according to INEGI. Adjusted for seasonality, industrial output grew 1% m/m in December (+0.74% m/m in November), keeping industrial output out of negative territory for the second consecutive quarter (+9.2% q/q s.a. in 4Q09 and +7.9 q/q s.a. in 3Q09).
A strong rebound in U.S. manufacturing sector by the end of last year led growth in Mexico’s manufacturing output, and consequently Mexico’s industrial production. Meanwhile, the other components of industrial production such as mining, construction and utilities, remained weak. The ongoing decline in Mexico’s oil output kept growth in that sector capped while weakness in residential and non-residential construction maintained that sector deep in the red.
The current results are in line with RGE’s view that Mexico’s economic performance by the end of 2009 was lifted by a rebound in US economic activity. In this context, Mexico’s GDP likely eased the pace of contraction in Q4 2009 to around 1.8% y/y from an average decline of 8.3% during the first three quarters of 2009. Overall, RGE expects Mexico’s GDP to contract around 6.8% y/y in 2009, after expanding 1.3% y/y in 2008. Moving forward, improvements in US growth and solid recovery in domestic demand, together with a low base, should support Mexico’s economic activity in 2010, especially in H1 2010 when RGE expects GDP to expand above 4% y/y (please refer to Q2 2010 Mexico Outlook for further detail). Data for the beginning of 2010 suggest that a strong recovery is under way. For instance, the auto industry is rebounding strongly at the beginning of 2010, where auto production jumped 102% y/y (1.2% y/y 3MMA) and auto exports surged 124% y/y (1% y/y 3MMA).
During the week Colombia, Chile and Peru central banks released their consensus surveys. In the Colombia survey, in which RGE participated, inflation expectations for the end of 2010 increased to 3.75% from 3.71% in January; however, for year end 2011 the average inflation forecast moved slightly downwards to 3.78% from 3.83%; meaning that inflation expectations remain anchored within the central bank target range of 2% to 4%. With regards to monetary policy, analysts expect the central bank to stay on hold at 3.5% during the February 26 monetary policy meeting and expect the central bank will raise rates above 4.5% by year-end from the current 3.5%. Finally, consensus anticipates the Colombian Peso (COP) to be about COP 2,000 by the end of 2010 and COP 2,093 by the end of 2011. In RGE’s view, inflation to year-end 2010 and 2011 will likely be around 3.85% and 4%, respectively, and the central bank should stay put at 3.5% during the February monetary policy meeting. However, RGE sees the central bank bringing rates to 5% by the end of 2010. On the local currency, RGE foresees the peso to be about COP 2,078 by the end of 2010 and COP 2,076 by year-end 2011 (please refer to RGE Q1 2010 Colombia Outlook for further detail).
In Chile, inflation expectations for year-end 2010 moved higher to 2.7% from 2.5% in the January survey, while it remained unchanged for year-end 2011 at 3%; indicating that inflation expectations are well anchored as the central bank target is 3% (+-1%). Meanwhile, GDP growth expectations for 2010 climbed to 4.9% y/y from 4.6% in January. On monetary policy, surveyed analysts expect the central bank to raise the reference rate to 2.5% by the end of the year from the current 0.5%. RGE expects inflation to be 2.8% and GDP to expand 4.9% in 2010. Moreover, RGE anticipates Chile’s monetary policy rate to close at 2.5% by the end of 2010 (please refer to RGE’s Chile Q1 2010 Outlook for further detail).
In Peru, inflation expectations for year-end 2010 and 2011 stayed well anchored at 2.1% and 2.5%, respectively, from the January survey. The central bank target range is 1% to 3%. Meanwhile, consensus revised up GDP growth forecasts for 2010 to 4.5% from 4.1%, while they kept growth expectations unchanged for 2011 at 5%. On the local currency (PEN), surveyed analysts expect a stronger Peruvian New Sol for year-end 2010 at PEN 2.82 from the previous PEN 2.89 and for year-end 2011 to PEN 2.8 from PEN 2.9. On RGE’s side, inflation will bounce back to 2.2% by the end of 2010 from 0.24% in 2009, and will likely be around 2.5% by the end of 2011. Moreover, RGE expects economic activity to expand 5.1% in 2010 and 5% in 2011, while the local currency is likely to be about PEN 2.8 and PEN 2.77 by the end 2010 and 2011, respectively.
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