Economic Climate Index for Latin America falls

MArcaFGV_IBRE_endossoThe Ifo/FGV Economic Climate Index for Latin America (ECI) – developed in partnership between the German Ifo Institute and the FGV taking as a data source the Ifo World Economic Survey (WES) – decreased by 6.3%, going to 75 points in January 2015 from 80 in October 2014. The decline stems from worsening of both ratings in relation to the current state of business and the expectations for the coming months: the Present Situation Index (PSI) fell 9.4% and the Expectations Index (EI) decreased 4.2%. All indicators are in unfavorable zone of the cycle and the general worsening means advance in the deterioration of the economic climate.At the global level the economic climate recorded a soft improvement, changing to 106 points in January 2015 from 105 points in October 2014. The Present Situation Index remained stable at 98 points, but the Expectations Index advanced 2%. The relative stability of the global result reflects two opposite trends. In the United States, following discontinuation of upward trend in October 2014, the ECI returned to growth (8.3%). In the European Union the announcement, by the European Central Bank, of an expansionary monetary policy (quantitative easing, QE) made all indicators improve, leading ECI to advance 104 points, to 113 points. In contrast, China, the second largest global economy, reported a drop in ECI driven by deterioration in expectations. In Japan and India the economic climate has improved. However, given the weight of China in Asian continent, the economic climate has not changed in the region between the surveys of October 2014 and January 2015. Among the BRICS, Russia leads the ranking of the worst ECI.

In the previous survey, the worsening in global economic climate, driven by the expectations, suggested worsening of the world scenario. For this reason, the results of this edition should be taken with caution. A more consistent recovery of the world economy will depend on the result of QE in Europe and the evolution of the Chinese economy. The United States, in more comfortable situation, are an exception in this scenario of uncertainty.

In the group of Latin countries estudied by the Latin America Survey, the economic climate has improved in Argentina, Chile, Paraguay, Peru and Uruguay. However, only Paraguay and Peru recorded favorable indicators in the favorable area. The improvement of ECI in Peru, by 13%, indicates that the drop in metal prices, combined with lower demand from China, is still not seen as a factor that can lead the country to a recession situation. In Paraguay and Uruguay the improvement of the indicator reflects the support to the policies adopted by the current governments. In Argentina, despite the improvement, the country remains in negative zone and a reason for improvement is not clear, and may be due to decreased tension with the vulture funds or the loan from China for the construction of infrastructure projects in the country. In Chile there was no significant economic change, but it was removed the fear that the current government would implement major changes in the educational system and in other areas of social policy, given budget constraints.

Bolivia, Colombia, Ecuador and Mexico recorded a fall in ECI. In the first three cases, the worsening should be linked mainly to the fall in oil prices. In Mexico, after the election of President Peña Nieto, the economic climate remained, in general, favorable during 2013 and part of 2014. The promise of reforms to modernize the economy, including the state oil company, was well received by experts consulted by the survey. However, the case of the disappearance of students in the city of Iguala and the delay of reaction by the federal government have been interpreted as a factor that undermined, in part, the confidence in the current President.

In Brazil ECI continues to be unfavorable. For the Ifo/FGV Latin America Economic Survey, experts seem to be expecting the promised macroeconomic adjustment measures to start operating. In addition, high inflation outlook, low growth and problems in water and energy supply do not help in the improvement of expectations.

Brazil was in 10th place in the ranking of average ECI of the last four quarters, led by Peru. Noteworthy is the fall of Colombia, that has been in that position since July 2014. The fall in oil prices contributed to the increase in the fiscal deficit and the current account in balance of payments (FGV-IBRE).