The Brazilian minister of Economy Paulo Guedes
Pro-market platform of minister of economy, Paulo Guedes, generated optimism among investors, but growth frustrated high hopes. Photo: Fabio Rodrigues/ABr

Latin America's economy will grow again in 2020, pulled by Brazil

If the largest economy of the region goes ahead with planned structural reforms and Mexico manages to come out of the doldrums, the region may surprise the world next year

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Overall, 2020 will be a year of slowdown, almost stagnant for the most developed economies. The United States is expected to grow less than 2%, China is expected to slow down from 6.2% to 5.7% and the world economy as a whole, the IMF and other institutions estimate, will grow by around 3%. It is emerging countries from different continents, including Latin America, that will help make a difference. And Brazil has the potential to lead this movement. 

After a contraction in the first three months, the country registered a 0.4% and a 0.6% growth in the following quarters, surprising analysts. Although at a slow pace, the Brazilian economy is coming back to life and with clear signs, ranging from the increase in domestic consumption to the resumption of some of the sectors most battered by the crisis that struck the country between 2014 and 2016, such as construction and service sector.

Business confidence returned with the approval of the Pension and Social Security reform and the maintenance of a favorable economic environment, with inflation under control and the benchmark interest rate at its lowest level, 4.5% per year. But nothing excites the Brazilian business community more than the liberal stance of the Minister of Economy, Paulo Guedes, who expects a tax reform and other projects to reduce bureaucracy and the revenue linkage that constrains the federal public budget to pass in Congress in 2020.

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In order to gain public confidence as well, a boost in the labor market would be the most important factor in 2020, when the country will also face a new reformist agenda amid local elections. Analysts have already warned, though, that the country’s labor market recovery will be slow and gradual. 

“Brazil certainly has the best conditions for growth among emerging markets, but it needs to carry out the necessary structural reforms to organize its economy, reduce its fiscal deficit, increase competitiveness and add legal certainty to attract investment,” said Alvaro Bandeira, chief economist from Modalmais investment bank, to LABS.

For him, if the country makes the necessary reforms and at the required speed, ie by 2020, “we can positively surprise (the world).” “The engines of growth would be associated with the agricultural, infrastructure, construction sectors, and a relevant contribution (of the return) of the consumption of products and services (by Brazilians),” says Bandeira. 

He explains that only Colombia approaches Brazil in terms of growth forecast, and may advance 3% in 2020, but with less ability to attract investment.

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Mexico, in turn, risks ending 2019 in recession or with a near-zero growth and continuing to struggle in 2020 if interest rate cuts and the renewal of the trade agreement with the United States and Canada, among other factors, do not have the desired effect.

In December, the country’s central bank cut its benchmark rates for the fourth time in a row. The decision was already expected by the market, because lower rates tend to increase consumption and credit and thus revive the economy. With low inflation (2.97% in November) and declining activity for three straight quarters, the risk of closing the year in recession is real in Mexico. Banxico itself reduced the country’s growth projection this year, which could be between a 0.2% contraction and a 0.2% expansion. The last IMF forecast, revised in October, pointed out to a 0.4% growth.

For 2020, Banxico’s forecast is for the economy to grow between 0.8% and 1.8%. The Modalmais chief economist is more cautious, talks about 1% growth for the Mexican economy, due to the new populist government that has taken measures that can complicate the country’s fiscal situation, such as the 20% increase in the Mexican minimum wage.

“Argentina, also with a new populist government, is close to defaulting on its debt, which will make it difficult to grow and organize its economy,” says Bandeira.

Speaking of specific sectors, Latin America will continue to be a key market for e-commerce and digital services in 2020.

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According to the GSMA consultancy, the region will have 450 million mobile internet subscriptions – reaching 100% adult penetration–by 2020. As a result, Brazil, Mexico and Argentina are in the top 10 of the global markets with the most hours dedicated to the internet.

No wonder the forecasts for e-commerce in the region are quite positive. According to Crunchbase data, e-commerce sales are expected to close 2019 above $ 84 billion, and grow 21.3% in 2020. In Brazil, a study by Euromonitor and PayPal points out that e-commerce can raise $28 billion in 2020, up 40% from 2019.

Besides that, the Americas Market Intelligence (AMI) points out that there is huge potential yet to be explored in the region. E-commerce makes up a mere 2% of the region’s total GDP and fewer than 1 in every 4 people are online shoppers.