Latin America’s two biggest economies surprise with stronger growth

Brazil and Mexico surprised investors with stronger-than-expected growth in data published Friday, indicating Latin America’s largest economies are holding up amid high interest rates and fast inflation.

Brazil’s economic activity surged 3.3 percent on the month in February, according to the central bank’s proxy for gross domestic product, roughly three times the 1.05 percent rise seen by analysts in a Bloomberg survey. The Mexican economy grew 1.1 percent in the first quarter from the previous three months, above the 0.8 percent median survey forecast, preliminary data showed. On an annual basis, Mexico expanded 3.9 percent, faster than all but one estimate in the economists’ survey.

The growth figures caught investors by surprise as central bankers in both countries keep monetary policy tight to smother above-target inflation. Brazil’s new government under President Luiz Inácio Lula da Silva is working to revamp credit flows, while Mexico has gotten a boost from continued demand in the US. Put together, the reports will give some pause to analysts who have warned that economic contractions are coming.

“Major developed markets have been surprisingly resilient so far this year, which may be helping to support exports,” said William Jackson, chief emerging markets economist at Capital Economics. “Wage growth in Mexico and Brazil has been pretty strong. And in Brazil’s case, the agricultural sector seems to be rebounding.”

Still, “central banks may be a bit concerned though,” Jackson said. “Stronger growth suggests that core inflation could remain higher for longer.”

Both economies have hiked interest rates aggressively to tame post-pandemic inflation, with Brazil’s borrowing costs at 13.75 percent and Mexico’s at 11.25 percent, among the highest rates within the Group of 20 countries.

While the Brazil central bank report does not provide a detailed breakdown, previous data from the national statistics institute showed that services jumped by 1.1 percent during the month in February, though retail slipped by 0.1 percent.

Meanwhile, Mexico’s economy has posted six straight quarters of growth, the longest run under President Andrés Manuel López Obrador. The expansion was supported by the services sector, which grew 4.4 percent annually in the first quarter, while manufacturing rose 2.7 percent and the agriculture sector 2.4 percent.

Goldman Sachs Group Inc raised its forecast for Mexico’s 2023 GDP growth forecast to 2.1 percent from 1.8 percent after the data, according to a note by chief Latin America economist Alberto Ramos.

“In Mexico, we’ve seen advances from everything that has to do with nearshoring,” said Andrés Abadia, chief Latin America economist at Pantheon Macroeconomics. “We’ve seen a sustained momentum in sectors that were lagging, and, in the case of Brazil, in the agriculture sector, since there was a good harvest.“