Moody’s Warns Growth of LATAM’s Middle Class is Slowing

After a steady rise during the past decade, Latin America’s middle class growth is slowing, thus negatively affecting both consumption and investment, according to a study by U.S. credit rating agency Moody’s.

Among the worst affected companies will be retailers, auto manufacturers, homebuilders, airlines, and sellers of high-ticket, credit-dependent and non-essential items.

“Economic growth throughout Latin America is slowing down, with growth in the first half of 2014 lower than we expected,” said Gersan Zurita, a Moody’s senior vice president and co-author of the report.

Moody’s forecasts that growth in Argentina, Brazil, Chile and Peru will fall below the average growth rate during the 2004-13 period, while Mexico is the only country where growth will exceed its historical average — although that is of little consolation given its tepid growth during the past decade.

Argentina is at high risk. In the past year, uncontrolled inflation, high interest rates and a painful recession have forced consumers to cut back drastically. Today, the credit ratings agency says the continuing economic decline threatens to undo much of the social progress of the last decade.

Bank lending is also decreasing by about 20% to 30% in Argentina. “The government’s sovereign default in July will further limit the funding options for businesses and lead to further devaluation of the peso, adding to inflationary pressures,” Moody’s warned.

While the long-term outlook for Brazil’s middle class remains positive, sentiment among consumers and investors has worsened significantly in the past three years, and the economy’s consumer-led growth has reached the point of exhaustion. High interest rates and high household debt could delay a rebound in Brazil’s consumer spending, although companies are generally well prepared to weather the slowdown.

Moody’s says an economic slowdown has cooled consumer spending in Chile and Peru this year, while declines in mining investment and global prices for both countries’ export commodities have resulted in slower growth.

In the wake of declining business and consumer confidence, rising inflation, and currency depreciation in Chile is higher than that in most of the emerging market currencies. Moody’s says only the government stimulus measures are likely to lead to slightly stronger growth in 2015.

Meanwhile, in Peru, Moody’s predicts a recovery in 2015 will be driven by stronger employment and firmer consumer confidence.

Moody’s also appears to be upbeat that Mexico’s recent reforms will lead to strong economic growth. “Higher government spending, especially on infrastructure, and an acceleration of the U.S. economy, a major trading partner, will boost demand and lead to faster job creation and wage growth,” the report said.

In Colombia, according to Moody’s, economic conditions remain favorable, and consumer spending is likely to remain at the current levels as the economy continues to expand.