Worsening economic climate in Latin America and ... - FGV Ibre

August 13th 2014

May 2015

Ifo/FGV Economic Climate Index for Latin America JANUARY/2015

75

APRIL/2015

71

Worsening economic climate in Latin America and improved in the World The 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 5.3% between January and April de 2015, moving to 71 points from 75 points. The drop was led by the Expectations Index (EI), which dropped 11%, while the Present Situation (PSI) increased 3.4%. It is observed that all the indicators are in negative zone of economic climate and the worsening EI is a concern, to indicate a possible worsening in the outlook for the next six months.

Present Situation

140

58

60

Chart 1: Economic Climate Index for world and Latin America (in points) 110

120 100 80

Expectations

60

71

40 apr/04

92

oct/05

apr/07

oct/08

apr/10

oct/11

apr/13

oct/14

82 Economic Climate Index - Latin America

Economic Climate Index - World

At the global level, the improved ECI which went to 110 points from 106 points was led by the performance of the European Union, that reported an increased of 11.5%, with improvements in both the assessment about the current situation and expectations. All indicators in the region passed to the favorable zone. In the United States the indicators decreased but remain above the average of the last ten years and are in the favorable climate zone. China continues to record negative economic climate since October 2014, despite an increase of 7.1% of ECI between January and April, to 91 points. This result is associated with an increase of 20% in EI, suggesting that the economy may be resuming an upward trajectory. Among the BRICS, Brazil recorded the lowest ECI, while India is the only country in the group with favorable ECI. (See Chart 2) Despite the improvement in the World ECI, the forecast for growth in world product in 2015 has been revised down. It was 2.5%, in the Ifo Survey of April 2014, and rose to 2.3% in April 2015. For Latin America, growth dropped to 1.3% from 2.3% over the same period. Among the 11 countries that the Economic Survey for Latin

Economic Survey for Latin America Ifo/FGV May 2015

America analyzes in detail, none reported increased projection between the two surveys. For Brazil, the forecast changed to a decrease of 0.9% from a growth of 1.7%.

Chart 2: Economic Climate Index for Selected Countries (in points) 151 145 146

150

160

131 128 126 121 120 113 120 109 112 104 100 100 85

129 133 128

140

80

111 89 85 91

78 81

82 73 58

60

75

62 45

57 57 49

40 20 0 European Union

United States

Japan

Germany

France

United Kingdon

China

India oct/14

Russia

South Africa jan/15 apr/15

Brazil

The worsening in the economic performance of 10 countries in South America and Mexico coincides with the assessment of the economic climate. The ECI is in favorable level only in Chile (increase of 33% between January and April 2015); and in Paraguay (stable at 127 points). In Peru, the ECI decreases to the neutral from the favorable zone (100 points) and Uruguay remains in the neutral zone. Besides Chile, only Argentina recorded an increased ECI, although still remains in negative zone. In the interannual comparison, the economic climate only improves in Argentina (1.3%) and Chile (19%). In Brazil, all indicators recorded decrease between the last two surveys: ECI (-14%); PSI (-27%); and EI (-9.5%). In the interannual comparison the drop in PSI is 68% and 31% in ECI, but EI reports a small increase of 2.7%. However, as expectations remain unfavorable and pointing to a worsening of the situation in six months, the slight improvement compared to last April has a small weight in the assessment of outlook of economic growth. In the periods of April and October, it is conducted a questionnaire for experts to attribute grades 1 to 9 for the main problems that hinder economic growth in the country. Grades between 1 and 5 indicate that those topics are unimportant; the lower the number, the less relevant. Grades 5 to 9 refer to questions classified as important; the higher the number the more important the problem. The table below shows the main issues identified as relevant to the countries of Latin America and Brazil. Lack of international competitiveness is an obstacle to economic growth in Brazil and other Latin American countries. Lack of confidence in government policy, Inflation and Public Deficit gained relevance in Brazil in the last three years. Shortage of Skilled Labour is no longer relevant in the last survey. In this case, the result may be associated with importance given to the lack of demand, for the first time since April 2009. This matter is not described in the table, as well as unemployment, trade barriers to exports, foreign debt and lack of capital, all flagged as not relevant to Brazil.

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LIMITING FACTORS TO ECONOMIC GROWTH Lack of

Lack of

Lack of skilled Public Latin confidence in Inflation international labour deficit America economic policy competitiveness Latin Latin Latin Latin Latin (without America America America America America Brazil) Brazil Brazil Brazil Brazil Brazil (without (without (without (without vs Brazil (without Brazil) 5.2 5.6 4.7 4.4 5.8 6.2

Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15

Brazil) 4.0 5.0 4.5 4.2 4.1 3.7

2.0 3.5 3.1 5.3 7.7 7.8

5.6 7.8 4.2 6.5 7.3 7.7

Brazil) 5.4 6.0 6.1 5.7 5.7 5.3

6.5 6.8 8.2 8.0 8.1 7.5

Brazil) 3.9 4.4 5.4 4.7 4.3 3.9

5.7 6.2 7.1 6.1 5.5 4.8

Brazil) 3.3 3.1 4.1 3.8 3.8 4.7

4.9 6.3 4.4 4.3 6.0 7.7

In short, the Economic Survey for Latin America shows that the outlook remains unfavorable for most countries. In Brazil for now there are no signs of recovery. Brazil remained in 10th place in the ranking of average ECI in the last four quarters, only better placed than Venezuela.

RANKING OF COUNTRIES Previous Position

Present Position

Country

3 1 2 4 5 7 6 8 9 10 11

1 2 3 4 5 6 7 8 9 10 11

Paraguay Peru Bolivia Colombia Uruguay Chile Mexico Ecuador Argentina Brazil Venezuela

Average ECI of the last 4 quarters Jan/15 122 123 122 119 102 86 95 84 61 60 20

Apr/15 121 115 110 106 100 91 89 71 61 55 20

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APPENDIX PRESENT SITUATION INDEX (IN POINTS) PSI oct/12 jan/13 apr/13 jul/13 Latin America Argentina Bolivia Brazil Chile Colombia Ecuador Mexico Paraguay Peru Uruguay Venezuela

102 72 140 98 154 122 120 100 60 136 120 52

98 78 116 92 172 118 100 100 122 154 144 20

102 60 114 94 164 112 140 114 158 152 110 20

90 88 114 66 140 106 120 100 154 140 130 20

oct/13 jan/14 apr/14 80 74 116 84 140 110 126 66 134 128 112 20

88 74 148 84 132 140 140 82 140 138 114 20

jul/14

oct/14

jan/15

apr/15

72 34 126 42 86 168 100 78 110 112 126 20

64 34 148 30 40 152 116 78 140 82 110 20

58 38 160 30 50 140 140 56 136 100 114 20

60 52 116 22 82 114 46 66 136 74 124 20

82 44 180 68 108 146 120 78 130 128 136 20

Average 10 years 99 97 103 113 131 124 96 87 105 142 143 62

EXPECTATIONS INDEX (IN POINTS) EI Latin America Argentina Bolivia Brazil Chile Colombia Ecuador Mexico Paraguay Peru Uruguay Venezuela

oct/12 jan/13 apr/13 106 122 100 146 80 78 80 94 158 94 90 84

120 130 100 144 92 94 60 126 158 126 108 40

104 74 100 128 90 100 100 114 166 114 80 36

jul/13 86 56 100 84 36 138 80 112 136 82 80 20

oct/13 jan/14 apr/14 96 80 100 106 68 116 74 112 122 110 78 20

102 80 100 94 76 136 74 124 140 126 86 20

jul/14

98 106 100 74 82 128 80 118 130 140 82 20

96 80 100 68 92 94 46 126 100 112 82 20

oct/14 jan/15 apr/15 96 60 100 84 110 82 52 116 110 150 80 20

92 88 60 84 120 40 20 112 118 162 86 20

82 100 68 76 144 54 46 78 118 126 76 20

Average 10 years 100 85 89 109 107 102 77 101 112 120 117 67

ECONOMIC CLIMATE INDEX (IN POIN) ECI Latin America Argentina Bolivia Brazil Chile Colombia Ecuador Mexico Paraguay Peru Uruguay Venezuela

oct/12 jan/13 apr/13 jul/13 104 97 120 122 117 100 100 97 109 115 105 68

109 104 108 118 132 106 80 113 140 140 126 30

103 67 107 111 127 106 120 114 162 133 95 28

88 72 107 75 88 122 100 106 145 111 105 20

oct/13 jan/14 apr/14 88 77 108 95 104 113 100 89 128 119 95 20

95 77 124 89 104 138 107 103 140 132 100 20

90 75 140 71 95 137 100 98 130 134 109 20

jul/14 84 57 113 55 89 131 73 102 105 112 104 20

oct/14 jan/15 apr/15 80 47 124 57 75 117 84 97 125 116 95 20

75 63 110 57 85 90 80 84 127 131 100 20

71 76 92 49 113 84 46 72 127 100 100 20

Average 10 years 100 91 96 111 119 113 86 94 109 131 130 64

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Methodological Note The Latin America Economic Survey aims for monitoring and forecasting of economic trends, based on quarterly information supplied

by economy experts in their respective countries. The survey is - simultaneously - applied with the same methodology in all countries of the region, a method that allows the construction of an agile and comprehensive picture of the economic situation in countries and economic blocks. In April 2015, were consulted 1092 economic experts in 115 countries, being 140 in Latin America. The survey generates information of both qualitative and quantitative nature. The Economic Climate Index (ECI), is the synthesis indicator, comprised of two items of qualitative nature, the Present Situation Index (PSI) and the Expectations Index (EI), which deal, respectively, with the general economic situation in the country at the moment and for the upcoming six months. The individual responses are combined for each country without any weighting. For the average value of each index to be reached, 9 points are assigned to positive responses (+), 5 to indifferent responses (=) and 1 to negative responses (-). The ECI represents an arithmetic mean of the two indices that comprise it. The process of aggregating data for a particular group of countries or continent is made according to the relative share of foreign trade (exports + imports) in each country regarding the total in the region. According to specific criteria of the survey, the phase of the business cycle the country is at the moment is determined by a combination of

PSI and EI. When the two indices exceed the average limit of 5 points, the economy is in the "boom" phase. When both are below 5 points, there is recession. The phase of decrease occurs when the PSI is higher and EI is lower than 5 points. And the recovery phase with a higher EI and the PSI lower than 5 points. Indicators on this report are presented considering the value 5 as 100. Thus indicators above 100 are in the favorable zone and below 100 in the negative zone.

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