Latin America shows sustainable manufacturing promise

Analysts with Manufacturers/MAPI said that despite som “deceleration,” Brazil and Argentina have exceeded pre-crisis manufacturing production levels and are set to post record highs.

According to its most recent report, “Latin America Manufacturing Outlook,  most industries are feeding into a “virtuous cycle” that will eventually help make growth sustainable, though marginally decelerating.

The analysis examines the latest trends and provides a near-term forecast for 16 major industries.

Mexico will contribute, but to a lesser extent, as the sub-par performance of domestic-centric industries limits the pace of that country’s manufacturing growth.

The report, authored by Fernando Sedano, Ph.D., MAPI Economic Consultant, 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 grow 8.6 percent in 2010, a slight increase from 8.3 percent growth forecast in MAPI’s August 2010 report. Manufacturing production is expected to show 4.2 percent growth in 2011, a deceleration but also higher than the 3.7 percent growth predicted in the previous forecast.

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.

The manufacturing upturn is a result of sizeable improvement in general economic conditions. The region is showing a sharp V-shaped recovery from last year’s recession, although the strength of the recovery is uneven across countries.

In Brazil, economic growth is underpinned by a vigorous internal demand and by the elevated price of its exports. Similarly, Argentina’s economy also benefits from favorable terms of trade, a vibrant domestic market, and strong demand from Brazil. Mexico’s export-linked manufacturers continue to see advantages from a rebound in U.S. activity via market share gains but its domestic demand remains anemic despite the ongoing U.S.-driven manufacturing upturn. The strength of the U.S. cycle and the future performance of domestic demand remain keys to Mexico’s manufacturing outlook.

The MAPI forecast for Latin America predicts manufacturing advancing to record-high levels this year, expanding output by 8.6 percent in 2010, the largest gain in at least two decades. The previous high was 6.9 percent in 2004. Manufacturing production will decelerate to a more sustainable 4.2 percent in 2011.

“The manufacturing sectors most severely hit by last year’s global economic crisis continue as the growth engines,” Sedano said. “The automotive sector shines, pushed by external demand in Mexico, a rising domestic market in Brazil, and rapidly growing exports and a solid domestic market in Argentina. Gains in the automotive sector have rapidly filtered through its major supplying industries such as basic metals, fabricated metals, rubber and plastics, machinery and equipment, and electronic equipment, among others.”

The report sees growth in 15 of 16 industries in 2010 and growth in all 16 industries in 2011. 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 most important to the forecast.

Food and beverages production, the largest industry in the region and one of the most stable, should grow by 3.8 percent in 2010 and rise by 3.1 percent in 2011. The automotive sector is forecast to improve by 30.9 percent in 2010 and further grow by 8 percent in 2011. The machinery and equipment industry should increase production by 22.2 percent in 2010 and by 6.8 percent in 2011.

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