Recovery stalls as Brazil suffers renewed downturn

The recovery that appeared to be underway in Latin America at the end of last year has faded in recent months, with several of the region’s economies experiencing renewed downturns. The latest slowdown has been concentrated in Latin America’s oil producers (Venezuela, Colombia and Mexico) but also in Brazil, where fiscal austerity has squeezed consumer spending and a deepening corruption scandal at the state-owned oil giant, Petrobras, has caused paralysis in the wider economy. Looking ahead, we think that in most parts of the region the downturn should bottom out around the middle of this year and expect growth to pick up as we head into 2016. But the recovery will be slow going and vulnerabilities, including large current account deficits, will remain. These deficits mean that, while inflation is likely to ease in most countries over the next year, policy interest rates are still likely to be raised as the Fed starts to tighten. For investors, the glimmer of hope is that much of the bad news may now be priced into financial markets. Accordingly, we don’t expect currencies to fall much further against the dollar and we think that equity markets should post gains.