A recently released analysis indicates that Latin America’s three largest economies are rebounding nicely from the recession. Brazil’s manufacturing production is expected to experience the largest surge, says the report’s author.

Latin America’s economies are showing a sharp V-shaped recovery from last year’s recession and, while growth is seen across the board, the drivers for the rebound differ.
That’s the optimistic news contained in the Manufacturers Alliance/MAPI Latin America Manufacturing Outlook (ER-704e). This biannual analysis examines the trends and provides a near-term forecast for 16 major industries.

The report focused on Latin America’s three largest economies: Brazil, Argentina and Mexico. The three countries generate more than 80 percent of region’s manufacturing output.

MAPI forecasts that overall manufacturing output in Latin America will grow 8.3 percent in 2010, a significant increase from the five-percent advance forecasted in the December 2009 report, says the report’s author, Fernando Sedano, Ph.D., MAPI economic consultant.

Brazil’s manufacturing production is expected to experience the most sizeable surge in 2010, Sedano writes. Looking at each country, he says this about Brazil:

  • In December 2009, Brazil’s economy was perceived as being in the best position to recover production levels very quickly. After falling by 2.2 percent, 1.6 percent, and 1.2 percent in the first, second, and third quarters of 2009, respectively, Brazil’s GDP expanded 4.3 percent in the fourth quarter of last year, finishing with an annual contraction of 0.2 percent. The robust growth trajectory continued in the first quarter of 2010, when GDP expanded nine percent, the fastest quarterly growth rate in 15 years. “Private consumption, the only aggregate demand variable to remain above water in 2009—other than government expenditures—started 2010 on a strong note, expanding 9.3 percent during the first quarter, although it is leading to some inflationary pressures. Prices increased 5.3 percent in the 12 months through April 2010—above the Central Bank’s target of 4.5 percent—and a tightening of monetary policy is under way,” Sedano writes. “The reference interest rate increased from 8.75 percent to 10.75 percent in the last three months. However, taking into account Brazil’s still relatively low credit penetration, more may be needed on the fiscal side to better address potential overheating, although a fiscal adjustment may prove difficult in light of October’s Presidential elections. We also believe that some of the concerns about overheating are exaggerated, at least in the medium term, as investments will surely play their role in mitigating any excess demand. In fact, investment was the fastest growing GDP component, reaching a record-high 26 percent growth rate during the first three months of 2010. In the short term, any excess demand is being met by surging imports, as the Brazilian currency continues to be relatively strong.”

He adds: “Going forward, the economy is expected to decelerate its growth pace as higher real interest rates filter through the economy and as quarterly figures compare with the higher level of activity seen in the second half of 2009. The consensus among analysts is that inflation adjusted GDP growth will reach 6.3 percent in 2010, before trending lower to a more sustainable 4.5 percent rate next year.”

Continuing his country-by-country analysis, Sedano observes:

  • In Mexico, manufacturing production will increase a more moderate five percent in 2010. A U.S.-driven manufacturing upturn in Mexico is leading to immediate job creation with positive potential implications for consumer spending, raising the odds for a stronger rebound than previously anticipated.
  • Argentina’s manufacturers are expected to increase their output levels by 6.8 percent in 2010 as its economy benefits from higher commodity prices as well as strong economic activity in China and Brazil.

In developing its forecast, MAPI utilizes data from national statistical agencies, assigning weighted average annual production indexes for each industry. The weights are determined by a country’s sector value added in U.S. dollar terms, using MAPI’s proprietary econometric model.

The report anticipates that during 2010 manufacturing production in Latin America will surpass pre-crisis levels. “The performance of the automotive sector, which accounts for a large share of Latin America’s manufacturing, remains key to the outlook,” writes Sedano. “Production is ramping up across countries and stimulating growth in a broad number of sectors. Food and beverages production continues holding up well and is in line with expectations. Machinery and equipment production—a major drag during last year’s downturn—is soaring as companies are investing to expand capacity to keep up with rising demand. As a result, industries such as basic metals and fabricated metal products, which supply the machinery and equipment and automotive sectors, are also expanding.”

The report sees growth in 15 of 16 industries in 2010 and growth in all 16 industries in 2011. Three industries—food and beverages; motor vehicles; and machinery and equipment—account for roughly 40 to 45 percent of the region’s manufacturing and, therefore, are most important to the forecast.

Food and beverages production, the largest industry in the region and one of the most stable, should grow by 4.3 percent in 2010 and rise by 3.6 percent in 2011. The automotive sector is forecast to improve by 22.5 percent in 2010 and further grow by 5.7 percent in 2011. The machinery and equipment industry should increase production by 26.7 percent in 2010 and by five percent in 2011.

A nonprofit organization established in 1933, Manufacturers Alliance/MAPI, engages in economic and policy research, continuing professional education, and allied activities. The Alliance’s corporate membership includes U.S.-based and international companies in manufacturing and related business services. For more information, visit the Web site at mapi.net. To receive a PDF copy of the complete report, call Manufacturers Alliance/MAPI Communications Director Jim Engelhardt at (703) 647-5126 or email jengelhardt@mapi.net. Fernando Sedano can be reached at fsedano@mapi.net.