The Ifo/FGV Economic Climate Index for Latin America (ECI) advanced, after having been stable in the last two surveys (July and October 2013). The 8% increase in the ECI (to 95 from 88 points) is explained by both the improvement in assessments of present conditions (PSI) and expectations (EI), but only the latter one went to the zone of favorable assessment. Furthermore, all three indicators are below the average of the last 10 years and, in addition, the region still has to improve its performance to ensure a stable growth trajectory. However, the result does not generalize to all countries in the region.
Among the 11 countries covered by the Survey, 8 recorded an ECI in zone of favorable assessment (Bolivia, Chile, Colombia, Ecuador, Mexico, Paraguay, Peru and Uruguay). Highlight on the performance of the following countries: Colombia, where the ECI has increased by 22% between the surveys of October 2013 and January 2014 (positive expectations for the performance of the sector of oil and entry of foreign investment); Mexico, which returned to the zone of favorable economic climate, after the drop of the ECI last October (improvement in the U.S. economy has a direct impact on the country). Chile was the only country among the eight that repeated the result of October (caution/waiting for the announcement of the measures of the new government that took office in January 2014).
So, what does explain that ECI in Latin America continues unfavorable?
Remember that indicators are weighted by the share of trade chain (exports plus imports) of each country in the region. After Mexico, with 35% share, followed by Brazil (22%) and Argentina, Venezuela and Chile, all with a share of 7%. However, Brazil, Venezuela and Mexico, which explain 36% of the trade chain are all in the unfavorable zone. Therefore, even with the improvement of the indicators of other countries, the weight of these three causes that the ECI in the region still remains unfavorable.
Venezuela and Argentina show the worst ECI in the region – 20 points and 77 points respectively – and kept the same results of the survey in October for all indicators. Brazil, which had improved the economic climate in the comparison between July and October, although still in negative zone, has worsened again and fell by 6.3% in the index which went to 89 points from 95 points. It is observed that PSI and EI in Brazil also dropped – 6% and 11% respectively – and all indicators are below the historical average of the last ten years.
With the results described above, Brazil, Argentina and Venezuela occupy the last positions in the ranking of Latin America.
A note should be added regarding the crisis in Argentina and its potential impacts within Mercosur. In Brazil, Argentina’s crisis can affect the auto industry, but Brazil’s total exports to that country does not reach 1% of GDP. Draws attention to the results of the survey the case of Uruguay, which improved the ECI, as well as Paraguay. Here we recall that 6% of Uruguay’s exports and 14% of Paraguay’s are intended for the Argentine market (year 2012). So “contagion” from Argentina via trade can be offset by other markets, which helps explain why the ECI of these countries seems not to have been affected by the Argentine crisis.
Worldwide the favorable results in the United States and the European Union consolidate the uptrend of the indicator.
The global ECI continued its path of ascension started in October 2012 and reached 114 points in January, remaining 8 points above the average of the last ten years. This improvement is linked to the performance of the United States (19.4% increase in ECI) and the European Union (4.4%). Among the largest economies of the developed countries, Japan recorded a drop in ECI, but remained in positive zone.
Emerging countries in the 2000s, especially after the crisis of 2008, led the growth of the world economy. Now with the recovery of the United States and the European Union and the results in emerging markets, many experts suggest that the situation is reversed. Moreover, rising interest rates in the United States, reduced liquidity in the international market and China growing at lower rates, create an unfavorable scenario for emerging markets.
The survey in January confirms the earlier view for Brazil and China, although this last one records a drop in ECI, but remains in the favorable zone. This indicates that domestic factors, besides the international scenario, should be considered in the analysis of the BRICs. Anyway, the indicators tend to be lower for BRICs compared to some developed countries.
Special Survey on the change in U.S. monetary policy
Finally it is worth noting that the Ifo Institute conducted a special survey regarding the change in the monetary policy of the United States. The question was: what is the expected impact on economic growth, interest rates, exchange and foreign investment of a less expansionary monetary policy in the United States? In general, the expected impacts are small and the region most affected is expected to be Latin America. The appreciation of the currencies in the region and the entry of foreign capital in the years 2010/2011 and part of 2012 associated with low interests in U.S. would explain this result. Brazil can be highlighted as one of the countries where the change in direction of U.S. policy causes concern.