Forecast: Recovery in Latin America will be 'Strong but Uneven'

The sharp manufacturing recession in Latin America during 2009 will be followed by a strong but uneven recovery, according to the Manufacturers Alliance/MAPI Latin America Manufacturing Outlook, a biannual analysis that examines the latest trends and provides a near-term forecast for 16 major industries.

The report focuses on Latin America's three largest economies – Brazil, Argentina, and Mexico – as these countries are responsible for more than 80 percent of the manufacturing output in the region. MAPI forecasts that overall manufacturing output in Latin America will decline 7.9 percent in 2009, a slightly larger drop than the 7.7 percent decline forecast in the July 2009 report. The report anticipates that manufacturing production should rebound in 2010 with 5 percent growth, higher than the 3.6 percent growth predicted in the July 2009 report.

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.

Brazil's manufacturing production is expected to decline 7.5 percent in 2009, influenced by sharp contractions in the automotive and machinery and equipment industries. In Mexico, manufacturing production will drop 9.9 percent in 2009, dragged down by the tumbling automobile manufacturing sector, machinery and equipment, and basic metals industries. Argentina's manufacturers are expected to reduce their output levels by 5 percent in 2009, also hindered by the underperformance of the motor vehicles and the machinery and equipment businesses.

Economic recovery, though, is in sight next year.

"We expect a rebound in overall industrial production during 2010 as our forecast envisions that all manufacturing sectors, with the exception of the wood products industry, will see production gains," said Fernando Sedano, Ph.D., Manufacturers Alliance/MAPI Economic Consultant and author of the analysis. "Latin America's economies are passing the trough of the recession and the focus now is on the strength of the recovery. Those countries attempting to export their way out of recession will experience a weaker rebound. Those countries with the right fundamentals for strong domestic demand growth, or those relying less on exports to developed countries, may see a more vigorous bounce back, absent policy slippage."

Sedano believes that Brazil's economy is probably in the best position to recover production levels relatively quickly, due in part to the surprising resilience of domestic consumption. Mexico, primarily because of its traditional links with the U.S. economy, has taken the highest toll from the global economic crisis and growth prospects are less promising given that country's worrisome fiscal situation. In Argentina, the consensus among analysts is that the recession has been relatively mild compared to its own past and to the performance of other economies in the region.

The report sees growth in only one of 16 industries in 2009, but growth in 15 of 16 industries in 2010. Three industries – food and beverages, motor vehicles, and machinery and equipment – account for roughly 40 percent to 45 percent of the region's manufacturing and, therefore, are keys to the forecast.

Food and beverages production, the largest industry in the region and one of the most stable, should decline by 0.2 percent in 2009 and grow by 2.3 percent in 2010. The automotive sector will see wide fluctuation in the next 12 months. It is forecast to decline by 25.7 percent in 2009 preceding 10.8 percent growth in 2010. The machinery and equipment industry should decrease production 18.5 percent in 2009 but rebound to 10.5 percent growth in 2010.