LatAm: Long Term Growth Differences

We see different patterns of growth for the Latin American countries. Brazil, Mexico and Argentina have different types of constraints that will define their long-term growth.

Figure 1: Annual GDP Growth

Source: Continuum Economics. *forecasts

We observe that the long-term growth trajectory for Brazil is influenced by two major constraints. Firstly, the aging population presents a challenge for Brazil, with the working-age population expected to decline in the upcoming years (Figure 2). Much of Brazil's recent growth has been driven by absorbing the labor force increase. Total Factor Productivity growth has been weak throughout the last decade, and we anticipate that structural reforms, such as new labor legislation and pension reform, will have limited impact on this front. Additionally, there have been constraints on capital growth, with Brazil experiencing limited and uneven investment growth in physical capacity. The pursuit of fiscal balance will further restrict infrastructure investment, impeding growth through capital accumulation.

Figure 2: Brazil and Mexico 2025 Population by 5yr Cohort (%)

Source: UN forecasts

As for demand, China's diminishing growth, coupled with its status as Brazil's largest trading partner, is expected to result in reduced demand for the commodities Brazil exports, such as [M1]iron ore. While Brazil has recently become the largest oil producer in Latin America, forecasts suggest a potential reversal in the production curve in the next couple of years. Nevertheless, Brazil holds significant potential for increasing its agricultural exports, thanks to available land, advanced technology, and a favorable climate. The challenge lies in identifying new markets at the right price as demand from China weakens and also bringing this land into proper agricultural use.

Our perspective is that Brazil will return to its pre-pandemic growth trend, with our estimates indicating a 1.7% long-term growth rate, as outlined in our calculations (here). The recent upswing in the labor market is not expected to persist as restrictive monetary policy is working to cool it down. We anticipate controlled inflation, and we believe the government will implement fiscal adjustments at some point to manage debt growth.

For Mexico, a distinct narrative unfolds. Firstly, its population is not as aged as Brazil's, and growth through labor absorption is poised to have a more substantial impact. However, we anticipate that the most significant influence will stem from the effects of nearshoring. It's crucial to clarify our definition of nearshoring. We do not envision the implementation of entirely new value chains in Mexico, given its lack of technical knowledge and skilled labor for high-tech industries. Instead, we foresee an intensification of existing industries such as the maquillas, bolstering the commercial relationship with the U.S. The primary beneficiaries will likely be the current industries already established in Mexico, expanding their production capacity.

Productivity is also expected to experience growth as the economy becomes more industry-intensive, a sector known for higher productivity compared to others. Both private and public investments, already exhibiting higher-than-expected growth, will contribute to long-term economic expansion. We may also observe spillover effects from the manufacturing industry to services, while the agricultural sector is likely to maintain its current growth trend. Our long-term growth projection for Mexico stands at around 2%. One significant risk factor is a potential shift from U.S. policy companies, if they review their policy of moving away from China value chains, Mexico will face a strong headwind.

Regarding interest rates and inflation, we believe that Banxico will succeed in bringing inflation back to its target, maintaining its independence even if MORENA remains in power.

Argentina is the country in which we face the biggest uncertainty. The country's macroeconomic imbalances increased this year, and the new administration under the leadership of Javier Milei will have a difficult task in decreasing the 150% (yr/yr) inflation, shrinking international reserves, monetary financing of the fiscal deficit, and the twin deficits (fiscal and commercial). We believe Milei's promises of dollarizing the economy and closing the central bank are unfeasible, but some adjustment plan is likely to be implemented with the aid of the IMF, which is likely to hold new talks over their USD 44 Bn deal.

We anticipate that Argentina will experience a better year in 2024 than in 2023, and the stronger agricultural production, aligned with the new gas pipeline “Vaca Muerta,” will help reduce the commercial deficit and generate additional dollars for the central bank. Regarding the fiscal deficit, it will depend on how deeply the new administration can cut expenditures. Despite some uncertainty, we believe Argentina will undergo an adjustment in the upcoming years and be able to reduce the inflation rate to around 30% by around 2026. We still maintain the belief that in the long term and in addressing these macroeconomic imbalances, Argentina could achieve a growth rate of around 1.7%.