Inflation

Over the past three years, the asset allocation team of BBVA Asset Management has overhauled its investment process to bring as much objectivity as possible to decision-making when building a portfolio. Based on the principles of behavioral economics, the new process aims to determine how the power of the mind affects financial decisions.

Economic activity in Latin America has been invigorated in recent months, in line with the recovery of confidence among families and businesses and a more favorable external context. In its Latin America Economic Outlook for first quarter 2018, BBVA Research forecasts that the region’s growth will increase from 1.1% in 2017 to 1.7% in 2018 and 2.5% in 2019.

The beginning of the normalization of monetary policy in 2018 should bring greater profitability for banks, a larger investor appetite and a positive outlook for the stock market. However, what is perhaps more important, the new policy will enable banks to meet one of their principal goals: supporting economic growth by financing companies and private individuals.

Once again, the Argentine economy faces critical decisions to avoid a new downturn and take the path to more sustainable growth. Markets are keeping a close eye on the post-electoral roadmap outlined by the administration of President Mauricio Macri.

The outlook for Argentina’s economy in 2018 remains optimistic, with GDP expected to expand by nearly 3% for the second consecutive year. However, achieving sustained growth and attracting international investment will depend, not just on stable macro indicators, but on long-lasting structural reforms. While the initial signs of economic recovery became apparent in the second half of 2016, it wasn’t until mid-2017 that growth rates began to pick up across most industries.

According to BBVA Research’s latest Spain Outlook report, 2017 will cap off Spain’s three-year run of GDP growth at rates above three percent. Recovery will continue in 2018, but at a slower pace, in an environment marked by rising uncertainties. The report was presented today by Jorge Sicilia, Chief Economist of BBVA Group and Head of BBVA Research, Rafael Doménech, Head of Macroeconomic Analysis of BBVA Research and Miguel Cardoso, Chief Economist Spain and Portugal. Considering this scenario, BBVA Research has downgraded its GDP growth forecasts for 2017 and 2018 to 3.1 and 2.5%, from 3.3% and 2.8% in July.

BBVA Research has upgraded its Latin America 2017 growth forecast by 30 basic points, citing improvement in domestic demand in Mexico and Peru. The BBVA Group study service expects the region to grow 1.1% in 2017 and 1.6% in 2018.

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Mario Draghi did not surprise anyone yesterday. As expected, the European Central Bank (ECB) unanimously decided to leave interest rates unchanged. He also did not announce any immediate changes to the asset purchase program. However, he did offer some clues as to the direction the ECB will follow after the summer.  As BBVA Research notes in its ECB Watch report, the discussion on gradually tapering QE (Quantitative Easing, the ECB´s asset purchase program) will take place in the fall – most likely in September.

Argentina and Brazil are finally pulling out of recession and driving the economic growth in Latin America as a whole this year, despite the slowdown in other countries in the region. According to BBVA Resarch’s ‘Latin America Economic Outlook’ Q3 report, the region will grow 0.8% in 2017 and 1.7% in 2018.

BBVA Executive Director José Manuel González-Páramo predicts that the European Central Bank’s (ECB) monetary policy will normalize next year. He estimates that the ECB will announce a slower pace for asset purchases in the fall. “I wouldn’t be at all surprised if we saw the first interest rate hike at the end of 2018,” he said, during the Círculo de Economía meeting in Sitges.

After the positive surprise of growth in Q3 2016 (+2% y-o-y) and the developments that took place in the final months of the year, we expect GDP for 2016, which will be disclosed in May, to close at about 1.2%, finally pulling out of the stagnation of recent years, and leaving a positive momentum for 2017.

Mario Draghi did not announce any new changes in monetary policy at Thursday’s press conference, but the latest European Central Bank (ECB) meeting did lead to some updates. On the one hand, the ECB is more optimistic about economic growth. On the other, it is raising its 2017 inflation forecast to 1.7% (from 1.3% in December) due to growing energy prices, but it barely changed its core inflation projection. And last, but not least, it added some nuances to its wording, which could be the prelude to changes in its monetary policy,  BBVA Research notes in its ECB Watch report.

South America’s GDP will recover in 2017 after four years of economic slowdown, while Mexico will bear the impact of the uncertainty surrounding US policies, which is likely to hinder its growth prospects. These are the key conclusions of BBVA Research's Latin America Outlook Q1 2017 report.

As expected, the ECB left its monetary policy and interest rates untouched and did not make any significant announcements at its January meeting. Mario Draghi’s comments on inflation do deserve special attention, however.

The 2017 business year will mark a turning point for Latin American economies, with an estimate growth of 1.3% for the region as a whole, compared to a 1.3% dip in 2016. This is what emerges from BBVA Research’s 4th Quarter Latin America Outlook report. The recovery, however, will be gradual and the region will remain well below potential growth, about 3%.

The ECB is leaving interest rates and the parameters of its bond buying program untouched and President Draghi dismissed rumors about removing monetary stimulus before March 2017. The ECB has no plans to end the program abruptly.

The trade finance or foreign trade activity accompanies people and businesses in their activity importing/exporting goods and services, mitigating the risks that exist in international commercial relations and simplifying the settlement of operations. The same commercial transaction can require different solutions over time, depending on the moment at which it takes place and the role of the parties involved (importer or exporter).

Slow recovery of commodity prices and weak economic activity have affected tax revenue. This has lead to adjustments in government spending in many Latin American economies. Therefore, despite some recovery in commodity prices over recent months, BBVA Research has lowered its growth outlook for the region to an expected contraction of -1.1% in 2016. In its Latin America Economic Outlook report on the second quarter, BBVA Research affirms that it does expect to see 1.7% growth in 2017.

GDP expected to grow at about 2% in a scenario marked by lower oil prices and a complex international context for the country’s investments and exports. Growth in 2016 will be driven by expansions in the petrochemical industry, imports and the services and construction sectors.

The latest batch of measures comes almost exactly one year later the ECB announced the purchase of EZ government bonds (March 9th, 2015). According to BBVA Research, with last Thursday’s announcements, the ECB stressed that there is ample room for further measures, dismissing the view that everything is done in terms of easing policy.

Latin America’s economy, taken as a whole, is set to contract 0.9% in 2016, dragged by Brazil’s recession. According to BBVA Research’s Latin America Situation report corresponding to the first quarter of 2016, the region’s economy is expected to start gaining momentum in 2017, with a growth rate of 1.9%.

Central banks in Latin America are finding it particularly difficult to meet their target of low and stable inflation, since many countries are facing at the same time problems of high inflation (fueled by the depreciation of the exchange rate) and low economic growth.

Brazil, the biggest economy in Latin America, is facing a political and economic crisis that is keeping the country in recession and will extend over 2016. We talked about the economic situation and outlook for the country with Enestor Dos Santos, economist at BBVA Research for Brazil, who explained that if the situation is to be normalized it is important to resolve the political situation first. This will reduce uncertainty, generate more stability and enable the right decisions to be made to allow the country to grow again. However, he clarifies that recovery from this economic recession will start gradually in 2017 and gather strength after the 2018 elections.