Q2 economic growth data surprised again to the upside driven by higher-than-expected exports, employment creation, and government stimulus
Companies should prepare for more marked slowdowns after Christmas, and after the austral summer recess in South America, during which propensity to consume will still be high despite budget constraints. We expect that consumer services will be prioritized over goods—especially leisure and travel—and within goods, those associated with deferred experiences during the pandemic, such as cosmetics or textiles, with durable goods linked to lockdowns suffering the most. Lower-income segments will be the most price sensitive, as inflation acts as a regressive tax. From a B2B standpoint, it is likely that companies will continue to scrutinize every cost line as they prepare for more challenging economic conditions, although revenue windfalls should help them maintain key investments as they enable growth into next year. Meanwhile, governments will delay execution of CAPEX projects as they free up resources to fight inflation, while already planning for a transition away from extra-generous budgets.
Overview
Latin America has proved more resilient than expected to headwinds coming from the war in Ukraine, the continuation of city-wide lockdowns in China, and faster-than-expected rate hikes by the US Fed, even as inflation rates have surpassed double digits in many countries. Q2 economic growth data came out better than expected in all Tier 1 countries: +3.0% YOY in Brazil vis-à-vis market expectations of just +0.4% back in March; +1.9% vs. +1.4% in Mexico; +12.6% vs. +7.9% in Colombia; +5.4% vs. +4.7% in Chile; +3.3% vs. +2.8% in Peru; and +6.9% vs. +4.2% in Argentina.
Our View
Stronger-than-expected consumer spending is the primary factor underpinning economic outperformance across most countries, with consumers showing strong propensity to draw down savings in order to maintain purchasing power. In Brazil and Colombia, which have seen the greatest outperformance relative to expectations, consumers have reduced overall savings the most—by 2.6% and 1.9%, respectively, since the beginning of the year through May—and as we get new months of data, this trend is expected to continue. It is not a coincidence that Brazil and Colombia also had the highest levels of consumer debt increases during the pandemic, as consumers leveraged an environment of low interest rates, which is now turning against them in the form of higher debt servicing costs as interest rates rise again. Governments have also helped shore up purchasing power through a combination of tax breaks, price subsidies, or price controls (in the case of Argentina and Mexico), expansion of cash transfer programs (Brazil and Colombia), and minimum wage increases above inflation (Chile and Peru). Also important, jobs have not only recovered pre-pandemic levels, but surpassed them in all major countries except Chile. Finally, exports have risen to commodity super-cycle levels because of product shortages coupled with still-strong demand across commodities, whether oil, metals and minerals, and food. As we head into Q4, it is unlikely that LATAM will be able to maintain this level of economic performance for much longer. First, excess savings will eventually deplete because of still-high inflation and a greater portion of household budgets being allocated to debt repayment, and LATAM has already exhausted the income boost that came with jobs recovery; second, governments will not be able to maintain the same level of social spending and subsidies sine die—as confirmed by Brazil’s budget for 2023, which already considers a lower stipend for the Auxílio Brasil cash-transfer program; finally, our global growth forecasts for 2023 call for recessions in the US and in Europe, and our growth bias with China’s already-decelerated growth is to the downside; this should have a cooling effect on commodity prices and exports, which we have already seen to some extent this year, with most commodities falling from previous highs in recent months.
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