Economic Outlook: Latin America

The outlook for Latin America is one of acceleration, but not all countries will follow this path. While the region’s economy will expand +3.4% in 2013 after growing just +2.6% in 2012, Central American economies will slow in line with the deceleration of the US economy.
Brazil makes the difference in the regional average, accelerating from a poor +0.9% growth in 2012 to a still relatively modest +3% this year.

The drivers of Brazilian economic growth will be increased investment – a big part of this is the need to complete infrastructure projects related to the forthcoming World Cup and Olympic Games.

Regional partner Argentina will continue to impose economic restrictions, including trade restrictions, hindering demand for Brazilian exports. Venezuela, Ecuador, and Argentina will see growth decelerate in 2013 as they pay the price of macroeconomic mismanagement.
These countries do not have room for policy manoeuvring - Venezuela and Argentina already have high inflation and Ecuador, use the US dollar as legal tender. Public finances are not in the best shape either, so increased spending is ruled out.

But improving global economic conditions brighten the outlook for the region in 2014. US GDP growth will accelerate from +1.7% in 2013 to +2.9% in 2014, China and India will also accelerate, and Europe will come out of recession.

This should mean that investment in Latin America will regain momentum while domestic markets will also contribute with more robust consumption. IHS Global Insight’s latest forecast is for Latin American GDP to expand +3.4% in 2013, before accelerating to +4.4% in 2014.

Within Latin America, Brazil dominates not just with size, but also growth. The confluence of the World Cup, Olympic Games, and massive energy related investments suggests growth above regional and global averages for the next three years. After these events, construction growth will slow, but the need to develop the country’s potential will keep construction spending well ahead of regional and global averages for the next decade.

Latin America accounts for just 4% of global construction, but the region has great potential as an emerging market. In 2012, construction in the region increased +3.4%, but in 2013, total construction spending will post a +5.2% gain.

Panama will experience the most rapid growth, with the Panama Canal expansion and the subsequent development of the Colón free-trade zone. This bodes well for construction activity, particularly for commercial, tourism, and residential structures.

Argentina and Costa Rica will have the weakest growth for the year, under +2% each. Moving forward, regional total construction spending in 2014 is expected to increase +6.1%.

Over the medium-term, the fastest growing segment will be infrastructure, with Panama and Brazil seeing the most impressive gains.

Venezuela and Ecuador will experience the weakest growth. Policy mismanagement and resource nationalism have made investments in these two countries risky. Over the longer term, spending on non-residential structures will have the highest growth.
Spending on residential construction will pick up slightly to +3.9% in 2014. The medium-term outlook is positive, with a +3.8% annual growth expected over the next five years, accelerating to +4.1% over the following five years.

Non-residential structure spending will increase 4.5% in 2013 and 6.2% in 2014. Brazil has the largest market, but Panama will lead growth. The medium-term outlook is for +4.6% growth over the next five years with office construction the most buoyant, while industrial construction spending will be the weakest.

Infrastructure focus

Infrastructure is the largest construction component in Latin America, with almost half of construction spending goes into this sector.
Infrastructure construction will increase +7.1% in 2013, followed by +7.5% in 2014. Brazil and Argentina have the largest markets for infrastructure construction, while Panama will have the fastest growth, at +13.7% in 2013 thanks to the canal project and construction of the Panama City metro.

In preparation for upcoming sporting events, Brazil’s infrastructure is increasing rapidly with expected growth of +10.5%; current projects include highway and road expansion and a high speed rail network. Infrastructure will see +7.1% annual growth over the next five years.
In the longer run, growth in infrastructure will moderate to +3.6% annual growth with spending on energy expanding the fastest.
In summary, Latin America offers strong potential. As the global economy recovers, the region’s growth will accelerate over 2013, with a strong outlook for the foreseeable future.