In a recent midyear report, Bank of America Merrill Lynch took stock of how their forecasts have fared. Apparently, Brazil was their only “big downside surprise,” as they put it. But they ended up on a positive note on Brazil for the remainder of the year. Here is what they wrote in their recent research report on Latin America:
“For 2H, we think investors should invert expectations for Brazil and Mexico. In Brazil, we expect the combination of lower policy rates and a weaker BRL will jumpstart the economy in 2H (see chart). We would not be surprised if additional policy tools are used to drive this acceleration, including cuts in RRR. We expect the industrial sector’s performance to be the acid test of our view, as it was the strong BRL that caused Brazilians to substitute domestic goods for imported ones in recent quarters. That should change for this new policy mix to be successful. We acknowledge that there are headwinds to the recovery, including a tight labor market, weak external demand and over-indebted consumers.
In Mexico, we expect activity to decelerate with the US economy forecast to slow down in 2H, and as fiscal spending eases after the presidential elections… Mexican economist Carlos Capistran argues that Mexico would not be able to escape from a slowdown if the US economy decelerates to 1% in 4Q, as our US economists forecast. In such a scenario, Capistran expects Mexican GDP to expand 3.4% in 2012 and 2.3% in 2013. Given that our house view for the US is below consensus, he estimates that Mexico could grow between 3.4% and 4.2% in 2012 and between 2.3% and 3.6% in 2013 if US growth is like the consensus and the bulls expect.”
Source: Bank of America Merrill Lynch