Our warning last year that Latin America’s economies were not immune to the economic weakness in developed countries and the slowdown in China was correct in terms of direction, but we underestimated the resultant magnitude of the slowdown in Latin America.
This was particularly the case for the largest economies, Brazil and Mexico, but for different reasons.
While Brazil’s economy experienced a slowdown primarily due to the deceleration of growth in its key China export markets for minerals and other commodities, Mexico’s weakness was tied more to the slow recovery in its key US markets and, arguably, as a result of the structural reforms that are being implement by Mexico’s new president.
In addition, much of Latin America enjoyed a consumer-led boom during 2010-12 and reached the point at which consumers overloaded with debt and needed to retrench. While the recent slowdown in consumer activity may turn out to be ‘the pause that refreshes’ and be followed in 2014 by another upswing in consumer spending, the slowdown could instead reflect more worrisome structural imbalances.
This perception particularly applies to Brazil, where structural problems have the potential to derail growth over the rest of the decade as its political and regulatory rigidities, plus conservatively run businesses, frequently exhibit all the symptoms of arteriosclerosis!
This problem is not unique to Brazil. Clearly Mexico, whose problems are not the same as Brazil’s but which has several similar issues, has been held back by its particular collection of vested interests and elites. And similar problems in other Latin American countries have led to street demonstrations for school reform (Chile) and for less authoritarian and corrupt political practices (Venezuela comes to mind, along with several other countries along South America’s Pacific Coast).
The purpose of this article is not to present advice on what Latin America could, or should, do. However, the analyst needs to recognise that, without some significant structural changes within Latin America, future economic growth, and the distribution of the wealth generated, will be held back by ‘the straitjacket of history’.
For Brazil, perhaps the single most important economic need is infrastructure investment. Joint public/private funding will speed up projects, but the gains in many cases will likely only be fully realised five to 10 years from now.
Improvements in educational attainment are also needed throughout the region.
Long-term forecasts of economic growth for countries in Latin America will be determined by how these structural issues are resolved. In the short-term (through 2014), while these structural limitations will hinder growth, most important will be developments in the region’s key markets, particularly China.
Clearly, China’s growth trajectory has shifted and it is the policy of the Chinese government to push China away from its old strategy of growth through investment and exports towards a more consumer-driven economy where investment takes a back seat. Exports will also contribute less to overall growth as China’s competitive edge is blunted by rising costs and competition from other Asian, African, and maybe Latin American, countries.
China still has large housing needs, but the huge infrastructure investments of the past two decades are coming to an end. Future investment will be more focused on infrastructure such as subway systems in cities as an alternative to traffic congestion. Over time, China will also become a greater importer of manufactured goods.
No doubt China will continue to import large quantities of commodity raw materials, but growth in demand will slow from that of the past 20 years. There is an increasing risk of global over-supply of commodities as new investments in response to past high prices – and strong Chinese-led demand growth – come on stream over the next few years. The impact of increased supplies on pricing for copper, iron ore, bauxite and even oil (as gas supplies jump over the next several years) will have major negative consequences for many Latin American economies.
Without additional sources of growth, much of Latin America could experience yet another of the commodity market-led swings that have peppered the region’s history. Mitigating boom-and-bust commodity cycles will be key as it seeks to sustain growth.
Developing strong domestic markets for goods and services will require rapid improvement in education and infrastructure throughout Latin America. Meanwhile, agricultural commodities to feed a growing world population will likely be a sustainable long-term sector in Argentina, Brazil and other Latin American countries.
Economies: forecasts
So far this year, forecasts for global economic growth have generally proved too optimistic and have been revised lower as the year proceeded. However, the consensus for a better second half of 2013, and further improvement for 2014, seems to be on-track.
China’s growth slowed through the second quarter, but seems to have at least stabilised and may indeed be moderately reaccelerating in the third quarter. But this could be another false dawn (like the fourth quarter of 2012). CFPA’s estimate of 7.4% GDP growth in 2013 could be a little optimistic, but improvement in the US and Europe will support China’s export sector, and growth closer to 8% in 2014 is certainly possible. Given that assumption, there will be a floor placed under the commodity exports from Latin America. Nevertheless, 8% growth in the ‘new’ Chinese economy will probably require fewer commodity exports per unit of Chinese GDP than under the ‘old’ investment-led economy. This will moderate the rebound in Latin America’s economic activity.
In the US, cutbacks in government spending are hampering the private sector’s attempts to grow the economy. The forecast for US GDP growth to accelerate to 2.7% in 2014, from 1.7% in 2013, could easily become a fairy tale if political intransigence over the debt ceiling, and the budget, as well as possible military intervention in Syria, combine to further hinder economic recovery.
However, given the current assumptions for the US, China and Europe (positive growth rather than recession after mid-2013), the spill-over benefits for Latin America will support better overall growth for this region in 2014 than 2013, allowing for the fastest expansion since 2011 (Table 1).
Focusing on four countries: Argentina, Brazil, Chile and Mexico, recent economic growth paths have largely been different from each other, reflecting circumstances as much unique to each country as to the region as a whole (Table 1).
Growth plummeted in Argentina in 2012 as bad harvests impacted the agricultural sector and the overall economy reeled from the policies of the central government. The economic prognosis for 2013 is more positive, because of a good harvest to boost exports of agricultural commodities. However, the fundamental problems of the economy remain: the energy system functions badly; foreign investment is discouraged by myopic nationalist policies; and inflation is rampant, despite government manipulation of the data. Consequently, the short-term 2013 boost to the economy expires in 2014 and Argentina promises to be one of the poorer performers next year as it tries to avoid another economic implosion.
Brazil disappointed in 2012 with growth of less than 1%. Despite significant attempts to stimulate economic activity through fiscal and monetary policies, it will be difficult for it to meet our estimate of 2.2% growth in 2013.
The modest increase in growth forecast for 2014, to 2.7%, may be hard to realise, but on the other hand a better set of outcomes among its trading partners could offset domestic weakness and allow GDP growth to climb next year by as much as 3.5%.
However, relatively high inflation has already resulted in rising interest rates, while the massive devaluation of the Real in mid- 2013 will tend to boost inflation as import prices climb. Nevertheless, exports will benefit and, on balance, currency weakness will support faster GDP growth in 2014, providing the currency does not quickly rebound to earlier levels.
Chile has enjoyed several years of strong growth, despite a massive earthquake and a shaky Chinese economy. Over the past three years, GDP growth averaged 5.8% per year, but weakness in the copper sector, and an over-extended consumer, will result in slower growth in 2013 (around 4%) and 2014 (3.8%).
If China’s rebound is stronger than anticipated, 2014 growth in Chile could be above 4%, but the main concern is that, even with an improved export outlook, reticent consumers will act as a brake on overall growth next year.
Lastly, Mexico ran into a rough patch in 2013 after registering 3.9% growth in 2012. Anaemic growth in the US, along with uncertainty related to a new president pushing long-needed structural reforms, have slowed Mexico’s growth this year. We estimate growth of slightly less than 2% in 2013, followed by a re-acceleration to 3.7% in 2014 as the US economy strengthens and the benefits of structural reforms start to percolate through Mexico’s economy and society. However, while the reforms will most likely provide long-term benefits to Mexico, the initial disruption to the economy could be more of a hindrance than we currently assume, and re-acceleration may have to wait until 2015.
Brazil and Chile production history
Panel production in South America’s two premier panel producing nations took divergent paths in 2012.
While the drop in Chile’s total production, because of the destruction by fire of the Arauco softwood plywood mill at Nueva Aldea, was expected, the 2012 story from Brazil was a surprise.
Despite very anaemic overall economic growth (GDP rose less than 1%), at 9.51 million m3, Brazil’s 2012 total panel production was almost 10% higher than 2011’s 8.67 million m3 (Table 2 and Figure 1). Much of the growth was in MDF (up 21% over 2011 to 3.68 million m3 in 2012), while MDP output climbed a more modest 6%, to 3.26 million m3. We estimate Brazil’s plywood production in 2012 was flat, as a small increase in softwood plywood output offset a decline in hardwood volumes.
Meanwhile, Chile’s total panel production of 2.49 million m3 in 2012 was down 11% from 2011’s 2.79 million m3 (Table 3 and Figure 2). This drop was entirely due to an estimated 35% tumble in plywood production, from 1.29 million m3 in 2011 to an estimated 0.85 million m3 in 2012. We estimate that Chile’s particleboard production rebounded in 2012 from unusually low levels in 2011, while MDF and OSB production recorded healthy increases (the OSB increase resulted in part from substitution for lost plywood output).
Brazil and Chile production forecast
Given the weakness in Brazil’s economy in 2012, MDF’s growth (and to a lesser extent that for MDP) reflects greater penetration of its key end-use markets, such as furniture and cabinets. Assuming that this penetration/substitution continues (and early 2013 reports support this assumption), then Brazilian MDF and MDP production will again grow faster than overall GDP. Compared to a 2.2% forecast increase in 2013 GDP, we look for a further 10% increase in MDF production for the whole of 2013; an 8% increase in MDP; and a modest increase in plywood output as higher North American exports early in the year offset weakness in European plywood demand. At 10.15 million m3, total 2013 Brazilian panel production will be up 7% over 2012. Slower substitution will be reflected in a smaller, 6%, increase in the total, to 10.78 million m3 in 2014. However, again MDF will outpace the overall growth, with increases of 10% and 7% respectively in 2013 and 2014, to 4.35 million m3 in 2014 (18% above 2012). Despite these large increases in MDF/HDF output, Brazil will still be facing excess capacity, even without the addition of new lines over the next several years.
Meanwhile, Brazil’s MDP output of 3.77 million m3 in 2014 would represent a 16% increase over 2012 (Table 2 and Figure 1).
Chile’s panel output will also jump in 2013-14, largely because of the start-up of the second CMPC plywood line late last year – and the re-opening of the Arauco Nueva Aldea operation at the end of this year. Forecast plywood production of 1.33 million m3 in 2014 will be up 57% over 2012’s low, but just 3% higher than the 2011 peak.
Very possibly, plywood production will be higher than forecast in 2014, if the ramp-up of the replacement mill is more rapid than estimated and if US plywood markets tighten further. The Chile forecast shows just moderate increases in MDF/HDF and MDP production; these estimates too could be low if exports of MDF panels and mouldings to North America, as well to destinations within South America, rise more rapidly than estimated. Nevertheless, even without higher volumes than forecast, at 3.03 million m3 in 2014, Chile’s forecast total panel production would set a new record, 22% above the 2012 low and 9% above the previous peak in 2011 of 2.79 million m3 (Table 3 and Figure 2).
Looking further ahead, the construction of three new MDF mills in Mexico, all scheduled to come on-stream in 2015-16, will lead to a significant rebalancing of Latin America’s MDF markets and a different role for Latin American producers in US markets. Exports to Mexico from South America and the US will be displaced by domestic Mexican production and the new capacity will have excess production available for export. However, this is a discussion for another occasion.
