Colombia’s central bank (Banrep) will likely stay on hold at 3% at its September 24 monetary policy meeting, as current inflation, although rising, is still below the central bank’s target of 3% and inflation expectations remain well anchored. Moreover, the economic outlook points to a below potential recovery path. An overvalued currency and heightened global jitters call for a steady monetary policy rate. Needless to say, given the government’s increasing anxiety about the overvalued Colombian peso (COP), attention will be placed on the board discussion about this matter.
On September 10, Mexico’s government reported that gross fixed investment declined by 2.1% m/m SA in June, after expanding 0.8% m/m SA in May, pushing the Q2 2010 performance to a contraction of 2.1% q/q SAAR, after expanding by 6.8% q/q SAAR in Q1 2010. On a year-over-year basis, investment grew slightly by 0.6% y/y, indicating a poor recovery, advancing 0.7% y/y in H1 2010, after collapsing 10.5% y/y in H1 2009.
The central bank of Chile (BCCh) revised upwards its 2010 GDP growth expectations to the 5-5.5% range from 4-5% in the previous release, thanks to a stronger-than-expected recovery during H1 2010 and early data for Q3 2010. The driver of growth has been domestic demand, characterized mainly by fixed capital formation and inventory restocking. Investment composition is expected to shift toward construction from machinery and equipment, which buoyed in H1 2010. Both transitory (earthquake rebound and low base) as permanent (monetary stimulus, credit and labor markets, consumer and business confidence) factors are behind Chile’s rapid recovery. This recovery has translated into an earlier closing of the output gap than expected in June’s IPOM, now expected for H1 2011. Still, economic expansion in upcoming quarters should remain strong, albeit slower than in H1 2010 as recovery effects from the earthquake vanish and the global economy slows down. In 2011, the economy is expected to expand between 5.5-6.5%, aided by a low base effect in Q1.
Brazil’s GDP data release last Friday gave just about everyone, including us, a pleasant surprise. The better-than-expected outcome for Q2 GDP growth—8.8% y/y and a seasonally adjusted annual rate (SAAR) of 5.1%—caused us to revise up our growth forecast for 2010 to 7.5% (7.25-7.75%), though we maintain our conviction that Brazil’s monetary policy committee is done with hikes until Q1 2011. Less accommodative monetary policy already has contributed to cooling the growth rate from Q1’s unsustainable 9% y/y and 11.3% SAAR. With the external environment deteriorating and the boost from pre-election government spending about to disappear, Brazil will see its economic expansion ease further in H2. In our latest LatAm Focus Week Ahead report, available exclusively to clients, we lay out our vision for growth and inflation dynamics in the coming months.
Argentina’s total tax revenues surprised on the downside, increasing by 36.7% y/y to 34.6 billion Argentine pesos (ARS) in August (consensus, ARS37 billion; RGE, ARS35.4 billion), easing from 40.6% y/y 3MMA. Government income benefited from strong, although decelerating, income (29% y/y), VAT (37% y/y) and social security contributions (26% y/y). Meanwhile, trade taxes buoyed at 69% y/y, as exports and import taxes increased strongly by 68% y/y and 74.5% y/y, respectively. Adjusted for official inflation, tax revenues increased by 23% y/y versus 27% y/y 3MMA; however, after adjusting for unofficial inflation of around 25% y/y, tax collection increased only around 11% y/y.
The urban unemployment rate in Colombia increased to 13% in the May-July period. Last year’s value of 12.8% indicates that unemployment in Colombia remains at a crisis level and highlights the inability of the economy to boost job creation. Along with unemployment, the global participation rate (65.6% from 64.8% last year) and the occupation rate (57.1% from 56.6%) also increased. The biggest contributor to job creation was the retail, restaurants and hotels sector, totaling 30.5% of the occupied workforce. Compared with a year ago, the sector grew 4% y/y. Communal services increased 3.6% y/y and accounted for 22.7% of the total workforce. Manufacturing, which accounts for 17% of the total workforce, failed to grow, while real estate, with 9.6% of the total workforce, contracted 2.8% y/y.
Investors will focus on IMEFs manufacturing and non-manufacturing indexes for August to size up business confidence and future growth prospects. Moreover, the central banks August survey on economic indicators will be closely monitored: Further improvements to the inflation outlook might take place, downward revision on GDP growth is likely and expectations of flat monetary policy rates for a longer than previously expected period might consolidate. Finally, the central bank will report on lending conditions by commercial banks to the private sector.
The president of the central bank of Chile (BCCh), Jose De Gregorio, said on August 24 that inflation in Chile is likely to increase above the 3% target in the second half of 2010, while economic activity has recovered faster than expected thanks to positive dynamics in investment and consumption. Hence, according to him, the success of inflation targeting requires the withdrawal of excessive monetary stimulus, consistent with the hiking of the monetary policy rate. Meanwhile, there is high uncertainty about global economic recovery. Financial markets have somewhat stabilized, although tension remains elevated. The divergence in the recovery between advanced economies and emerging markets has translated into capital flows to emerging markets, accompanied by the weakening U.S. dollar and gains in emerging stock markets.
Argentina’s economic activity expanded 11.1% y/y in June 2010, short of RGE (11.7% y/y) and consensus (11.5% y/y) expectations, cooling off from May’s 12.4% y/y, the strongest annual growth rate since March 2004. In Q2 2010, economic activity expanded 11.1% y/y (-0.8% y/y in Q2 2009), bringing the H1 2010 expansion to 9% YTD (0.5% YTD in 2009).
Venezuela’s results are a big surprise as they show a dramatic improvement in the country’s economic conditions, which is difficult to digest given the current dynamics the country is undergoing.
Venezuela contracted 1.9% y/y in Q2 2010, after a 5.2% y/y contraction in Q1 2010 and surprising markets to the upside. In Q2 2010, Venezuela’s government consumption printed a positive 3.1% y/y, compared with 0.2% y/y in Q1 2010, and investment recovered from a dramatic -39.5% y/y in Q1 2010 to a positive 0.1% y/y in Q2, with fixed capital investment rebounding to -0.8% y/y from -23.8% y/y in Q1 and aided by an over 200% spike in inventories. Consumption remained in the negatives at -2.4% y/y. Exports summed to US$16 billion (US$15.2 billion in oil exports) and imports totaled US$9.9 billion. Oil sector GDP contracted by 2% y/y, while non-oil sector fell by 1.7% y/y.