The 2017 business year will mark a turning point for Latin American economies, with an estimate growth of 1.3% for the region as a whole, compared to a 1.3% dip in 2016. This is what emerges from BBVA Research’s 4th Quarter Latin America Outlook report. The recovery, however, will be gradual and the region will remain well below potential growth, about 3%.

BBVA Research’s report notes that external tailwinds that timidly favored Latin America, begun to dwindle in November, after the U.S. Presidential elections, wiping out part of the gains in asset prices and exchange rates observed throughout the year.

“In recent months, global activity has started picking up, and the growth rate is accelerating slightly above the annualized 3%, with positive confidence indicators and apparent improvements in world trade,” explains Juan Ruiz, BBVA Research’s Chief Economist for South America. “However, growing uncertainty over the economic policy of the new administration in the U.S. is causing financial tension levels to strongly increase, especially in emerging economies in general and Latin America in particular,” he added.

Confidence indicators bounce back

According to BBVA Research, the confidence indicators in most countries have started recovering slightly, after remaining at depressed levels during most part of the past two or three years.

BBVA Research has reflected this turning point in the confidence indexes (and, as a result, in consumption and investment) to its growth forecasts for the region. “We anticipate that most countries in the region should show stronger growth rates in 2017 than throughout this year. The main exception will be Mexico, where investment and activity are already bearing a significant impact of the uncertainty over U.S. economic policies. Thus, Regional average growth will reach 1.5% in 2017 compared to -1.3% in 2016, a growth rate that is still somewhat moderate with respect to the region’s potential – 3% – but which will mark the end of the slowdown that started in 2013,” said Juan Ruiz.

However, the performance will be uneven across the region, with Pacific Alliance countries (Chile, Colombia, Mexico and Peru) growing above average.

Inflation under control in South America

In the past three months, inflation has grown at increasingly moderate rates in most economies in the region, except for Mexico and Paraguay, where, however, it is still under control. “We expect inflation to continue decreasing in South America, and to progressively grow in Mexico”, said Juan Ruiz. In line with this dynamic, BBVA Research’s expert expects South American central banks to continue cutting interest rates while, in the case of Mexico, the next increases will be even more aggressive than the ones the Federal Reserve is expected to implement.

BBVA Research indicates that the risks for the region’s economies have a downward bias. The most relevant factors are weaker-than-expected global growth rates. “In the U.S., the elections should help dispel lingering uncertainties concerning economic policies, to help determine whether it will lead to a process of measures aimed at facing the risks of lower potential growth in the long-term,” underscores the report. “But beyond that, the key is whether the Fed will raise interest rates gradually – a strategy that would help avoid collateral effects in emerging economies and in Latin America in particular – or not.”

In the medium term, the imbalances of the Chinese economy are showing no signs of decreasing, and this could lead to sudden adjustments.

Domestically, although each country is different, the report underscores thatthe region is still facing the risks of an eventual escalation of the political noise, a downturn in confidence trends and a delay in infrastructure investment projects.