The findings are outlined in the recently released Latin America Manufacturing Outlook report from the MAPI Foundation, the research affiliate of the Manufacturers Alliance for Productivity and Innovation.
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The semiannual analysis that looks at trends in the region and provides a near-term forecast for 14 major industries. Fernando Sedano, Ph.D., MAPI Foundation economic consultant, and author of the report, expands upon his analysis and discusses the factors behind what looks like a strong year ahead for Mexico on one hand, but a challenging one for the rest of Central and South American manufacturing on the other.
Overall, Sedano reports that manufacturing output in Latin America declined 0.1 percent in 2014, but forecasts it will increase a modest 1.8 percent in 2015, a decline from the estimated 2.1 percent figure anticipated in MAPI’s July 2014 report. The forecast was developed through data from national statistical agencies, with each industry assigned weighted average annual production indexes for each industry. The weights are determined by a country’s value-added in U.S. dollar terms in each sector, using a proprietary econometric model.
“When looking at Mexico versus Brazil and Argentina, it was a really two different stories,” Sedano says, adding, “Mexico finished a positive 2014 and is expected to continue such in 2015, while Argentina has struggled and Brazil potentially faces an outright recession.”
For Brazil, it’s a country that hasn’t experienced any manufacturing growth. There was some economic growth, but there was no manufacturing growth in four years. “The Rousseff Administration, which was recently reelected, has appointed a new economic team and have laid out a number of policies that are designed to turn around the current situation in a sustainable manner,” he says, but adds, “However, in the short term, these policies are going to be very painful to adjust to, especially in manufacturing.”
For Argentina, it’s about a similar decline in domestic production. And yet, in spite of Brazil’s and Argentina’s forecasted struggles, Mexico continues to hum along, with many analysts predicting a growth of four percent, although Sedano says he expects that number to be closer to three percent. As the three main industrial drivers in Latin America, their respective aggregate outputs is what led to the predicted overall 1.8 percent growth figure in the region for 2015.
“The export-oriented car making industry has been the growth engine in Mexico and there is now strong evidence that expansion across that industrial supply chain will occur in 2015,” Sedano says, adding, “Brazil’s economy is in stagflation mode—a mix of recession and inflation. Manufacturing activity decreased six percent year over year during the last six months and business and consumer confidence plummeted. Similarly, Argentina’s manufacturing weakness is explained by a sharp retreat in car production, as domestic sales and exports to Brazil continues to decline. Argentina’s economy is also in stagflation mode.”
Below, is a more specific country-by-country breakdown of the report:
MAPI reports that Brazil’s manufacturing industry (48.7 percent of MAPI’s regional index) stopped growing four years ago and the country has reached what Sedano calls an “economic crossroads.” “The government will need to make some tough policy decisions to take the economy out of a slump, lower inflation, and address the deteriorating fiscal picture,” he says, adding, “With business sentiment at its lowest levels in a decade, it is not surprising to see plunging demand for durable industrial and capital goods.”
The MAPI foundation says that Brazil saw a 1.8 percent manufacturing production decrease in 2014, down from 1.6 percent growth anticipated in the previous report, and forecasts a 1.6 percent growth in 2015, down from 2.2 percent in the July forecast.
Argentina’s manufacturing prospects (12.6 percent of the regional index) are pessimistic. Although the country reached a record-high car production in 2013, output fell an alarming 21.6 percent in the first 10 months of 2014 and tighter controls on imports are shaping numerous other industries. “It was 2.4 percent in 2014, and I’m forecasting 0.7 percent in 2015, compared with the respective previous forecasts of 0.7 percent and 0.5 percent declines,” Sedano says.
Mexico, differing from the report’s negative forecasts towards Brazil and Argentina, instead is expecting an expansion based on a strong 2014. The country’s manufacturing output (38.7 percent of the index) increased by a somewhat strong 3.4 percent in the first nine months of 2014, with the automotive sector, basic metals factories, and fabricated metal plants leading the way.
Sedano says that Mexico’s strong position is largely the result of the positive cycle currently occurring in U.S. manufacturing. “External factors are very important to the success of Mexico’s economy, particularly with respect to the U.S. market,” he says, adding that “Automotives are the growth engine to Mexico’s manufacturing sector with nearly 85 percent of the vehicles produced there going into the U.S—so as the U.S. continues to grow in manufacturing, so will Mexico’s as a result.”
On the other hand, countries like Brazil and Argentina are ones that heavily depend upon their own domestic economies and Sedano says that they, and by extension many other Latin American countries, will need to diversify their markets more. “While Mexico’s reliance upon the U.S. economy has led to their recent success, Brazil, Argentina, and many others in the region who principally rely a domestic market need to open up and expand their economic avenues as internal demand slows.”
To learn more about the report, visit www.mapi.net/research/publications/latin-america-manufacturing-outlook-december-2014.
FERNANDO SEDANO, PH.D., MBA, M.S.
Fernando Daniel Sedano is the Latin American Economic Consultant for the MAPI Foundation, the research affiliate of the Manufacturers Alliance for Productivity and Innovation (MAPI), where his work is used by nearly 700 global manufacturing companies to support present and future business decisions. He also serves on the Board of Directors for the Canadian Chamber of Commerce in Argentina and Brazil.
Beyond his economic research endeavors, Sedano is also the Director of Government Relations within Latin America for BlackBerry, a position he has held since 2011. Prior to that, he served as the Manager of Operations and Investor Services at Argentina’s Investment Development Agency, ProsperAr—a former government institution dedicated to promoting and facilitating foreign investment into the country.
Sedano’s academic background includes a Bachelor’s Degree in International trade, a Masters in Business Administration, and a Ph.D in Economics, all of which were earned at Auburn University.
The MAPI Foundation is the research affiliate of the Manufacturers Alliance for Productivity and Innovation (MAPI). MAPI is a member organization focused on building strong leadership within manufacturing, and driving the growth, profitability, and stature of global manufacturers. MAPI contributes to the competitiveness of U.S. manufacturing in several ways. MAPI provides the timely and unbiased information that business executives need to improve their strategies, boost productivity, and drive innovation. To learn more, visit www.mapi.net/research.