Pacific Alliance: divergent growth and inflation paths

by: Marijke Zewuster

  • Growth in Chile, Colombia and Peru picks up, but continues to slow in Mexico
  • Inflation is low in Chile and Peru, moderate in Colombia and high in Mexico
  • Nominal rates diverge, but real interest rates are quite similar
  • Politics could lead to further postponement of investments in Chile and Mexico
171127-Short-Insight-Pacific-Alliance-divergent-growth-and-inflation-paths.pdf (67 KB)

1. Different growth paths in Pacific Alliance

According to recently published Q3 GDP figures, the sharp growth deceleration in Chile, Colombia and Peru has come to an end, but continues in Mexico. Chile, Colombia and Peru benefited from higher commodity prices. In Chile, GDP growth accelerated from 0.1% yoy in Q1 and to 2.2% yoy in Q3. In Colombia, GDP growth rose to 2% yoy in Q3, up from 1.2% in Q2. In Peru, growth picked up from 2.2% yoy in Q1 to 2.5% in Q3. By contrast, in growth in Mexico slowed from 3.2% yoy in Q1 to 1.5% yoy in Q3 due to a fall in investments combined with the disruptive impact of the earthquake on mining activities.

Next year, we expect growth to rise in all countries, but the balance of risks will remain tilted to the downside.





2. Different inflation levels as well

Chile and Peru were able to keep inflation within the target range for most of this year. In Colombia, inflation came down from a high of 9% yoy in July 2016 to 3.4% in July 2017. Meanwhile, it has subsequently risen to 4.1% in October, just above the upper range of the target. Mexico is the exception. The combination of prolonged currency weakness and rising food and utility prices pushed inflation up to 6.4% in October. For next year, we expect inflation in Mexico to fall, but most likely not below the upper range of the target. Chile, Colombia and Mexico have a target of 3%, and Peru of 2%, all with a range of +/- 1%-point versus the central target.






3. Varying nominal rates, but rather similar real rates

The central banks of Chile, Colombia and Peru lowered their policy rates by 100, 300 and 200 bp, respectively, since the start of their easing cycle at end-2016. Mexico was the only country where the policy rate was raised. Still, if we look at real rates, monetary policy overall seems to have become less accommodative than in 2015/16 when negative real rates prevailed. It is also interesting to note that real interest rates converged in all countries to levels between 0.5 and 1. We do not expect real rates to fall below this range in 2018. This also means that the room for further monetary easing next year is most limited in Chile and Peru, while Mexico has the most scope.






4. Politics risks could lead to further postponement of investments

Fears of a continuation of centre-left policy in Chile and the possible shift to the left in Mexico could lead to a further postponement of already weak investment levels in these countries. In Chile, former president Sebastian PiƱera from the opposition right-wing Chile Vamos coalition will face Alejandro Guillier, the candidate supported by the current president Michele Bachelet of La Fuerza de la Mayoria, in a second round of the presidential elections on 17 December. This could be a close call, especially if the parties from the centre-left to left unite behind Guillier. In Mexico, elections are scheduled for July 2018. Andres Manuel Lopez Obrador (AMLO), leader of the leftist MORENA party, is in the lead in most polls.