JP Morgan issued a cautionary forecast for Latin America’s two largest economies: Brazil and Mexico.
The US investment bank predicted that depreciating currencies could fuel inflationary pressures for Mexico and Brazil in the coming months.
While inflation in both countries appears contained for now, JP Morgan expects a shift in the second half of the year.
“Inflation is going to behave differently,” JP Morgan analysts warned, suggesting that central banks may be forced to implement rate hikes to curb rising prices.
Brazil’s inflation rate hit 4.24% in August, consinderably lower than the 5%+ seen in 2023, but above the numbers seen during most of Q2 2024. In Mexico, inflation hit 4.99% in August, keeping with the rising trend seen through most of the year.
In Brazil, inflation is forecasted to rise beyond the central bank’s target, with projections exceeding 4.2%. This would surpass the comfort zone set by the country’s monetary authorities. JP Morgan anticipates the Central Bank of Brazil being pushed to raise interest rates at least three times before the year’s end.
The financial markets are already responding to the sharp depreciation of the real and the sustained pace of economic activity. The bank noted that investors are factoring in a potential rise in the SELIC rate to 12%, reflecting growing concerns about the central bank’s “credibility” in maintaining its policy course.
Mexico faces a similar challenge, with rising consumption and a weakening peso driving inflationary concerns.
The country’s upcoming federal administration may exacerbate these pressures. Markets expect president-elect Claudia Sheinbaum to continue at least some of the more business-hostile policies of her predecesor, President Andrés Manuel López Obrador (AMLO).
Coins falling
As Brazil and Mexico brace for potential monetary tightening, the depreciation of their currencies remains a key factor to watch, with inflationary risks looming large on the horizon.
During 2024, the Mexican peso has lost much of the terrain it managed to gain on the US dollar over the past three years. The peso has lost 14.28% of its value compared to the US dollar since the year kicked off. It opened 2024 being valued at 16.96 units per USD, its best performance since 2015. By early September, its valuation had fallen to around 19.75 units per USD.
The year has been similarly gloom for the Brazilian real. It has lost 14.14% of its value compared to the US dollar. It opened 2024 valued at 4.85 units per USD. As of early September, it was valued at 5.62 units per USD.
JP Morgan has described Mexico’s recent economic performance as lackluster. The bank’s data point to Mexico’s GDP expanding by just 0.2% in Q2 2024.
“The economy is running out of steam,” the bank noted, adding that the combination of weak growth and rising inflation could severely undermine Mexico’s economic stability.
JP Morgan’s economists lowered their growth forecast for the Mexican economy in 2024. The bank expects a 1.3% by the end of the year, down from its previous 1.8% forecast. Mexico’s central bank revised its own projections for 2024 and 2025 down to 1.5% and 1.2%, respectively.
Mexico’s services sector has been particularly sluggish. It grew only 0.1% in Q2 2024. JP Morgan expects this slowdown to persist into the latter half of the year.
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