As overheating fears in Brazil grow, Mexico’s slowdown deeper than expected

SAO PAULO (ICIS)–The financial week in Latin America ends with the confirmation that its two largest economies’ performance is taking diverging paths as Brazil’s unexpected healthy growth brings to the fore overheating fears, while Mexico’s slowdown is proving harsher than previously thought.

Healthier-than-expected growth in Brazil occurs against the backdrop of a fast-slowing Mexican economy, where political woes at home and in the US, due to the upcoming presidential election, are taking a toll on output, expected by the IMF below 2% in both 2024 and 2025.

This week, official figures in Mexico confirmed the slowdown in August, compared with July, with output in most subcategories, including petrochemicals-intensive sectors such construction, falling. Output was still up on a year-on-year basis.

The latest IMF GDP growth forecasts published this week were another jag of cold water on Mexico’s new Administration led by Claudia Sheinbaum, with the Washington-based body expecting output to expand just by 1.5% in 2024, down from its previous forecast for 2.2% growth.

The IMF added output would slow further in 2023, growing at 1.3%. See bottom table for data on the main Latin American economies’ GDP growth and inflation forecasts.

Meanwhile, Brazil’s economic performance has outpaced all forecasts in 2024, at home and abroad, and is likely to end up expanding by 3% or slightly more this year, which is causing unexpected price rises and a reversal of the monetary policy easing started a year ago: interest rates are due to stay higher for longer there.

MEXICO WOES INCREASE AS US POLL NEARS
A cynical observer of North American politics may say that the most important election for Mexico is not its own, which was held in June and returned to Parliament a historic supermajority for the center-left, statist Morena party of President Claudia Sheinbaum.

The most important poll for Mexico, the argument goes, would be that of the US, Mexico’s main clients for around 80% of goods the country manufactures.

The statement could ring true from 2025 onwards if Republican candidate Donald Trump is voted back into the White House, with promises to implement sweeping import tariffs hikes, including for Mexico and Canada, the two countries sharing the USMCA free trade zone with the US in North America.

As opinion polls remain tight in the big Mexican neighbor, uncertainty south of the border increases, and business expansion plans are put on a wait-and-see mode.

The peso (Ps) has weakened by nearly 15% against the dollar year to date, and it would be expected to take a direct hit on 6 November if the morning after the election Trump is voted back into the White House, according to analysts.

On Friday, the peso was trading at $1:Ps19.90, a sharp depreciation from the $1:Ps16.97 exchange rate it started the year trading at.

Despite the peso’s depreciating, making dollar-denominated imports more expensive for Mexican companies and households, the overall economic slowdown is continuing to cause a fall in inflation.

This week, Mexico’s statistics office said the much-followed inflation figure for the first fortnight of October had continued falling, leaving still room for the central bank – known as Banxico – to lower interest rates in its upcoming monetary policy committee (MPC) meeting in November.

The headline annual rate of inflation stood in the first half of October at 4.7%, practically flat month on month, with the breakdown of the data showing non-core inflation fell to 9.7% year on year, while core inflation – which excludes more volatile prices for food and energy – was broadly unchanged at 3.9%, year on year.

However, 5 November could be a before-and-after day for Mexico’s economy, with its currency the first to react to a potential Trump return to the White House.

“The fall in Mexican core services inflation in the first half of October in principle gives Banxico space to press ahead with another 25bp [basis points] rate cut next month, but much will hinge on the outcome of the US election,” said analysts at Capital Economics this week.

Mexico’s main interest rate benchmark was set in September at 10.50%.

“An abrupt move down in the peso could put the easing cycle on pause … The outcome of the US election may well change the outlook for monetary policy in Mexico, especially if a Trump victory leads to a sharp sell-off in the peso. This would probably prompt Banxico to pause (or even reverse) its easing cycle.”

Adding to the doom and gloom, US credit rating agency Fitch said on Friday that, as well as changes to trade policy, a Trump Administration could also have negative implications for Mexicans living in the US and the remittances they send home, which are a key income source for millions of Mexicans to make ends meet.

“Central American countries in particular will be highly vulnerable to policy changes as their economies rely heavily on remittances … Immigration tightening and a more confrontational posture from the US towards Mexico and Central American countries could emerge should former president Donald Trump be re-elected,” said Fitch.

“While implementation remains uncertain, his administration has increasingly indicated a willingness to significantly restrict border crossings and materially increase deportations of undocumented migrants.”

Remittances do matter, especially for smaller Central American countries. According to Fitch’s calculations, remittances in El Salvador and Nicaragua account for more than 30% of their GDP.

In Mexico, remittances’ weight has risen from 2% in 2014 to the current 3.5%. Due to its large economy, the size of Mexicans’ remittances stood in 2023 at just over $63 billion – a figure larger than several smaller Latin American countries’ annual output.

Fitch added that a Democratic victory in the election would mean policy continuity, not least because candidate Kamala Harris and Vice President has overseen immigration policy in the past four years.

However, Democratic proposals show how the immigration debate has tilted towards the right, with some proposed restrictions unthinkable just a few years back.

“The administration has voiced the intention to push for a bipartisan law that failed to pass in 2024 after Republican objection. The bill aims to close loopholes in the asylum process, give the president greater authority to shut the border when crossings are high, and limit immigration parole, which allows migrants to temporarily enter the US,” said Fitch.

BRAZIL BOOM HAS UNWANTED SIDE EFFECTS
As previously analyzed in this article earlier in October, Brazil’s economy has beaten the odds in 2024, with its GDP expected to expand by more than 50% than most forecasts said at the beginning of the year – from below 2% to potentially slightly above 3%.

This success is coming accompanied by a series of challenges, not least inflation and interest rates, which remain high. That fact has made Latin America’s largest economy to reverse course on easing monetary policy, on fears that lower borrowing costs would be set to spur already healthy consumption and feed inflation higher.

The president of the Banco Central do Brasil (BCB), Roberto Campos Neto, said earlier this week inflation risks remained skewed to the upside.

His colleague at the central bank’s board in charge of international affairs, Paulo Picchetti, reiterated the bank’s commitment to continue bringing inflation down, even if that implied making consumption more expensive via higher borrowing costs.

“We chose to be completely data-dependent [on next moves], with a clear commitment to do what is necessary in terms of monetary policy to make inflation converge to the target,” said Piccheti, quoted by news agency Reuters.

Brazil’s central bank has the mandate to keep price rises at around 3%.

Brazil’s data for the H1 October inflation continued showing price rises widening, compared with September, with the annualized rate at 4.5%, up from 4.1%.

“A lot of the rise can be pinned on a further rebound in food and electricity inflation [caused mostly by extreme weather events, with a severe drought hitting the country in August and September]. Core services inflation dropped which, on the face of it, is encouraging,” said Capital Economics.

“But that was driven by volatile items, such as airfares. We estimate that the central bank’s measure of underlying core services inflation, which strips out such items, ticked up last month. Taken together with comments from BCB policymakers warning about strong services inflation and unanchored inflation expectations, a step up in the pace of rate hikes from 25bp to 50bp is looking increasing likely.”

Brazil’s main interest rate benchmark, the Selic, currently stands at 10.75%.

IMF forecasts (in % change)	GDP growth 2023	GDP growth forecast 2024	GDP 2025 growth forecast	Inflation 2023	Inflation forecast 2024	Inflation forecast 2025
Brazil	2.9	3.0	2.2	4.6	4.3	3.6
Mexico	3.2	1.5	1.3	5.5	4.7	3.8
Argentina	-1.6	-3.5	5.0	133.5	229.8	62.7
Colombia	0.6	1.6	2.5	11.7	6.7	4.5
Chile	0.2	2.5	2.4	7.6	3.9	4.2
Peru	-0.6	3.0	2.6	6.3	2.5	1.9
Ecuador	2.4	0.3	1.2	2.2	1.9	2.2
Venezuela	4.0	3.0	3.0	337.5	59.6	71.7
Bolivia	3.1	1.6	2.2	2.6	4.3	4.2
Paraguay	4.7	3.8	3.8	4.6	3.8	4.0
Uruguay	0.4	3.2	3.0	5.9	4.9	5.4
Latin America and the Caribbean	2.2	2.1	2.5	14.8	16.8	8.5

Focus article by Jonathan Lopez