Latin America’s big economies falter: Brazil, Mexico and Argentina all contracting in first quarter

The International Monetary Fund cut its outlook for global growth to the lowest rate since the financial crisis in its latest outlook issued in April. The world economy will grow 3.3 % this year, down from the 3.5 % the IMF had forecast for 2019 in January, according to the latest World Economic Outlook. World trade, which had been growing at about 5%, expanded by 3.8% last year and is forecast to rise 3.4% in 2019.

Latin America is particularly hard hit, as the region’s three largest economies are all contracting for the first time in three years.

In a very worrisome analysis, Bloomberg says that Latin America “is on the verge of suffering another lost decade.”

The in-depth Bloomberg article reports that the region is still struggling to cope with the end of the commodities boom, and has expanded only 0.7% a year on average during the past few years, not enough to keep up with population growth.

Now its biggest economies — Brazil, Mexico and Argentina — have contracted simultaneously for the second time in just over three years, according to the International Monetary Fund.

Trade tensions – especially between China and the U.S.—as well as “structural weaknesses” that were not addressed when agricultural, energy and metals prices soared over the past decade are among the reasons cited for the weakness. In particular, the analysis cites Mexico’s inefficient state-owned oil company and unsustainable social security spending in Brazil.

Bloomberg reports: “Brazil’s economy shrank between January and March, a key central bank activity index showed May 15. (NOTE: the country’s first quarterly contraction since 2016.) For all of 2019, forecasters see Latin America’s largest economy expanding little more than 1%, its third year of such tepid growth. What’s more, Brazilians’ average income plunged 8% during the last recession and have since stagnated, according to a May 17 report by Affonso Celso Pastore, a former central bank president.”

Brazil’s shrinking GDP is fueling recession fears. On May 20, another article in Bloomberg reported that economists surveyed by the central bank are now saying Brazil’s economy will expand 1.24% this year, half of what they expected three months ago. This is the twelfth straight week that they reduced their estimates. Brazil grew 1.1% in both 2017 and 2018.

In Mexico, growth shrank in the first three months of the year as oil output and demand for services dropped and the government contained spending. Bank of America now sees just 1% growth this year. The U.S.-Mexico-Canada trade deal failing to win approval, erosion of confidence in the government and further declines in crude output are all risks, reports Bloomberg.

In Argentina, the economy shrank 6.8% in March, the 11th straight year-on-year monthly decline, in what may prove to be the longest downturn the country has faced yet. President Mauricio Macri’s efforts have so far proven unsuccessful and inflation is running above 50%.

Among the smaller countries in Latin America, Chile’s economy is stagnating, and Peru posted its lowest quarter of growth since 2017. Both economies rely heavily on their mining industries, and have been hurt by the U.S.-China trade war.

This does not take into account the complete economic collapse in Venezuela.

The economic downturns in the region are reflected in lower sales in the duty free channel: Duty free sales slipped by 20-25% from January-April ASUTIL Secretary General José Luis Donagaray told media in a webinar in April. Furthermore, at that time he said that the industry does not expect to see improvements “until October at least.”

 “It’s been a very tough period for the industry in South America. Brazil is not developing as the big growth engine to push the business,” he said.