The Effect of Politics on GDP Growth in Latin America

The Effect of Politics on GDP Growth in Latin America

Brazil and Mexico under the Spotlight

After an overall improvement in economic activity in Latin America, it is widely expected that its GDP growth will accelerate. However, on-going political insecurity and forthcoming elections in both Brazil and Mexico could adversely affect the region’s economic viability and investment potential could drop. With major investments from across the globe focused on the region, what can be expected going forward?

Brazil

In spite of political insecurity, Brazil showed promise throughout 2017. In 2018 this positive trend continued as economic activity continued being supported by more robust commodity prices and monetary easing. The country’s GDP is anticipated to increase from 1% experienced in 2017 to 2.5% in 2018. After close to 300 basis points of monetary easing was experienced at the end of 2017, a trend of additional monetary easing is also anticipated. This could, however, be scuppered in October 2018 when the critical presidential election is due to take place. Former President Luiz Inácio Lula da Silva is the front-runner and, should he be elected, it is feared that structural reforms will be rolled back.

Mexico

Even though Mexican exports continue to benefit from the US market, domestic activity has drastically slowed down. It is anticipated that the economic growth of the country will be stable at a low 2% and with inflation running at above 6%, consumer spending power is under great duress. As Mexico’s monetary policy stays rigid, the likelihood of this easing is not high. Due to economic volatility, foreign direct investment and corporate capital expenditure are running beneath trend. As with Brazil, the upcoming presidential election is weighing heavy on the country’s economy, and should leftist Andres Manuel Lopez Obrador be elected, the conflict between Mexico and the US could increase even further.

Will political instability affect GDP growth?

Investors from across the globe with an interest in Latin America are keeping a close watch on the continued political instability of both Brazil and Mexico and many are waiting for election results before making large-scale investment commitments.

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