Latam Weekly: Regional Economic Activity and Tariffs vs Global CPIs and China Macro Flood

ECONOMIC OVERVIEW

• Next week’s relatively quiet Latam calendar, where only monthly economic activity readings out of Chile, Colombia, and Brazil stand out, sits in contrast to a busier slate abroad that includes U.S., U.K., Canadian, and Japanese CPI and an early-week Chinese data flood.

• The U.S.’s latest tariffs action has been relatively well-digested by the broader market that is banking on Pres Trump backing down (again), but market calm may backfire, emboldening the White House to follow through on announced tariff hikes. Tariff developments thus remain squarely in focus.

• In today’s report, our team in Peru gives their take on next week’s GDP data that are expected to show an acceleration in growth albeit softer than in recent months, with some mining and fishing volatility to blame. In Colombia, the economists discuss the latest inflation print and fiscal news in the country, reaffirming their expectation for a 25bps cut by BanRep at its month-end announcement.

PACIFIC ALLIANCE COUNTRY UPDATES

• We assess key insights from the last week, with highlights on the main issues to watch over the coming fortnight in the Pacific Alliance countries: Colombia and Peru.

MARKET EVENTS & INDICATORS

• A comprehensive risk calendar with selected highlights for the period July 12–25 across the Pacific Alliance countries and Brazil.

Chart of the Week

ECONOMIC OVERVIEW: REGIONAL ECONOMIC ACTIVITY AND TARIFFS VS GLOBAL CPIs AND CHINA MACRO FLOOD

Juan Manuel Herrera, Senior Economist
+52.55.2299.6675 
juanmanuel.herrera@scotiabank.com

• Next week’s relatively quiet Latam calendar, where only monthly economic activity readings out of Chile, Colombia, and Brazil stand out, sits in contrast to a busier slate abroad that includes U.S., U.K., Canadian, and Japanese CPI and an early-week Chinese data flood.

• The U.S.’s latest tariffs action has been relatively well-digested by the broader market that is banking on Pres Trump backing down (again), but market calm may backfire, emboldening the White House to follow through on announced tariff hikes. Tariff developments thus remain squarely in focus.

• In today’s report, our team in Peru gives their take on next week’s GDP data that are expected to show an acceleration in growth albeit softer than in recent months, with some mining and fishing volatility to blame. In Colombia, the economists discuss the latest inflation print and fiscal news in the country, reaffirming their expectation for a 25bps cut by BanRep at its month-end announcement.

Next week’s relatively quiet Latam calendar, where only monthly economic activity readings stand out, sits in contrast to a busier slate abroad. The wave of Latam CPI releases in the past couple of weeks (Mexico, Colombia and Chile, and Peru) now gives way to inflation readings out of the U.S., Canada, the U.K. and Japan that will be the highlight for global markets alongside China’s early-week macroeconomic flood. U.S. retail sales, PPI, industrial production, and U Michigan survey results, and employment prints out of Australia and the U.K. round out a busy week in the G10.

The U.S.’s tariff rates announcements over the past few days have been generally well digested by global markets that seem conditioned to expect the White House to scale back its trade hawkishness. On the flip side, it appears that President Trump may be more emboldened to go ahead with these hikes as markets fail to act as a check on his threats. With three weeks to go until these new duties kick in, on August 1^st, markets will be paying close attention next week to how trade talks may evolve, with a hope that current tariff rates are maintained—or the tariff hikes can is again kicked down the road.

For the Latam countries, developments around the floated 50% tariff on copper imports and Brazilian goods loom as the main off-calendar risks for sentiment in the region.

Recall that, in early-April, the U.S. had imposed only a 10% tariff rate on Brazil as the country is one of the few with which the U.S. runs a goods trade surplus (though accounts for only ~1.5% and 2.5% of U.S. imports and exports, respectively). Clearly, the latest tariff hike all the way to 50% on Brazilian goods—about the same rate faced by China (with whom the U.S. ran a ~$300bn deficit in 2024)—was not predicated on an ‘unfair’ trade relationship with Brazil, but on Trump’s opinion regarding the ongoing trial of former Brazilian President Bolsonaro.

Yet, even the latter is reportedly mulling asking the White House to reverse this tariff hike. Bolsonaro successfully talking this rate down would be supportive for Brazilian assets (and possibly the globe’s), though perhaps unsavoury from a political standpoint as President Lula takes the other side, standing his ground against the latest U.S. tariffs salvo. At writing, there are no obvious signs (or motivations) that the U.S. will go back on this threatened tariff hike that will affect 12% of all Brazilian goods exports (slightly below 2% of GDP).

On copper, Chile’s ~70% share of U.S. imports of refined copper (2024 data) would place the country at the highest relative risk were a 50% duty rate to be imposed, with Peru next in the region at ‘only’ about 7% of U.S. copper purchases—which the team in Lima discuss in today’s report. However, it’s important to highlight that, according to the U.S. Geological Survey, the U.S. depends on imports for about 50% of its domestic copper consumption—a similar share to its foreign aluminium reliance, but much higher than its 15% iron and steel imports dependence.

With domestic manufacturers already contending with 50% duties on aluminium and steel, and limited domestic sources for copper (with decades needed to materially ramp up U.S. mining output), it seems unlikely that the White House will follow through with such a high tariffs rate, weighed by outcry by manufacturers and inflationary risks.

In the meantime, miners in Chile and Peru should benefit from (even more) increased frontrunning of possible tariffs, temporarily enjoying higher export volumes at higher prices. There may be some caution around the path for future copper demand but given 15–20-year discovery-to-startup development cycles for mines, a likely short-lived disruption from tariffs should only be a bump in the road. Watch for noise around where the copper duty rate may end up come August.

Turning to next week’s data calendar, Brazil, Peru and Colombia will publish economic activity figures for May on Monday, Tuesday and Friday respectively. In today’s Weekly, our economists in Peru discuss their expectations for a 2.5% y/y rise in GDP for the month, accelerating from April’s 1.7% expansion although slower than the 3%+ pace it had market from 4Q24 to 1Q25. However, setting aside volatility in mining (with a mine temporarily shutting down for maintenance) and fishing sectors reveals a solid underlying rate of growth above 3%.

Colombia’s economy is estimated to have expanded by around 2% in May, or about double the 1.1% reading for April. We’ll get more clarity on where this print may land on Tuesday, when the DANE publishes data for industrial/manufacturing production and retail sales that are expected to show weakness in the industrial sector against a strong performance for retailers based on trends for auto sales and goods imports for the month. The data are unlikely to materially influence BanRep’s rate decision on the 31^st, where our economists in the country expect a 25bps rate cut as they outline in today’s report. The latest inflation overshoot has opened the door for BanRep to roll out this small rate cut, but with inflation trends expected to turn less favourable over 3Q/4Q officials may only be able to announce one additional 25bps cut over the balance of the year. Fiscal worries, as highlighted in their write-up also remain an important consideration. 

PACIFIC ALLIANCE COUNTRY UPDATES

Colombia—Robust Inflation Data Confirms Monetary Policy Under Fiscal Dominance 

Valentina Guio, Senior Economist
+57.601.745.6300 Ext. 9166 (Colombia)
daniela.guio@scotiabank.com

During the week, inflation indicators surprised to the downside relative to market expectations. The monthly variation was 0.10%, leading to a decline in the annual inflation rate from 5.05% to 4.82% y/y. This result was significantly below our forecast of 0.24% m/m and 4.97% y/y, mainly driven by declines in food and electricity prices. Notably, the categories of restaurants and hotels, along with transportation, accounted for 80% of the total monthly variation, as discussed in our previous report (see here). Based on these data, we now expect total inflation to close 2025 at 5.17% y/y, down from our previous forecast of 5.32% y/y, but still pointing to the possibility of a rebound in the second half of the year.

Following the downside inflation surprise, we maintain our expectation of a resumption of the easing cycle, with a 25bps rate cut at the July meeting, taking the policy rate from 9.25% to 9.00%. Despite the current downtrend in inflation, we anticipate a potential rebound in September–October due to unfavourable base effects from the same period in 2024. This scenario could limit the central bank’s room to continue easing toward the end of the year. As a result, we expect only one additional rate cut in September ending the year with a policy rate of 8.75% (chart 1). Under this scenario, the real interest rate would rise to 4.0% compared to the estimated neutral rate of 2.7% for 2025, indicating that monetary policy would remain in a tightening stance. 

During the week, the FI curve experienced significant flattening. Although we initially expected a positive reaction following the downside inflation surprise, the effect was offset by Colombia’s new debt strategy as described in the Medium-Term Fiscal Framework (see here). The strategy includes overweight new issuances in the short end and belly of the curve, while in the long end the new issuance has been lower and additionally the MoF is doing bond purchases to implement its strategy of rate differentials and the creation of the strategic reserve. According to COLTES holders report, the Ministry of Finance (MoF) purchased additional COP 3.8 tn in June, which was an activity likely regarding to this debt strategy. Furthermore, the MoF continued its debt swap strategy, exchanging short-term (2026) for longer-term bonds (2029, 2033, and 2040), which contributed to the flattening of the yield curve.

In FX markets, the weakness of the U.S. dollar has supported currency appreciation across the region. In Colombia, the peso has appreciated by 8.1% y/y up to date, closely aligned with the 9.0% average performance of regional peers. Over the past two weeks, the Colombian peso reached its strongest levels in a year, a movement also supported by the relatively high real interest rate maintained throughout the year, which remains attractive for carry trade operations. In this context, we have revised our 2025 year-end USD/COP forecast from COP 4,367 to COP 4,249, reflecting the recent appreciation trend. However, compared with the current levels, we expect renewed upward pressure on the exchange rate if fiscal or external risk indicators materialize in the coming months.

Under this current environment, monetary policy guidance is clearly being influenced by fiscal uncertainty, which is counteracting the expected path of the easing cycle. At its most recent meeting (see here), BanRep held the policy rate steady at 9.25%, in line with the average market expectation. Governor Villar noted that fiscal risks are contributing to a higher neutral interest rate. While the decision was not a direct response to the recent downgrades by S&P and Moody’s, the central bank acknowledged that fiscal concerns are limiting the space for a more accommodative monetary stance.

Peru—GDP Growth Continues to Slow, but Domestic Demand is Still Holding Up

Guillermo Arbe, Head Economist, Peru
+51.1.211.6052 (Peru)
guillermo.arbe@scotiabank.com.pe

On July 15^th, Peru’s GDP growth figure for May will be released. We expect 2.5% y/y growth. This is better than the 1.7% growth seen in April, but below the +3% growth that had been trending during Q4 2024 and Q1 2025 (chart 2).

When you take a closer look of the breakdown by sector, the message is more mixed. What pulled down growth in May was mining, down 7.2%, mainly because of a 63% decline in iron production, after Peru’s main iron producer, Shougang, temporarily shut operations in order to repair operational machinery. Operations returned to normal in late June. Additionally, fishing GDP declined 20%, due to intermonth fluctuations in fishmeal catch. Note that fishing GDP growth tends to be volatile.

What is encouraging, however, is that leading indicators (see Table of Leading Indicators) suggest that those sectors of the economy that are not resource-linked, but, rather, more representative of domestic demand, are doing quite well. Overall, domestic demand continues to show signs of around 3.5% growth.

However this may be, the fact is that GDP growth has underperformed expectations in April and May to an extent that cannot be recovered in June. As a result, we are changing our Q2 growth forecast from 3.5% to 3.0%. This new quarterly figure continues to leave us within the margin of error surrounding our full-year growth forecast of 3.3%, however.

Copper Tariff Blues

The topic of the day is the 50% tariff that the U.S. government intends to levy on copper imports starting August 1^st. This represents a risk, as it’s difficult to envision a tariff this high not having an impact on the U.S. demand for copper.

The United States is not the main market for Peru’s copper. China is. In 2024, only 4% of Peru’s copper exports went to the U.S., versus 69% sent to China (chart 3). To an extent, this is anecdotal, since, as copper is commodity, it doesn’t matter where Peru exports to. The adjustment mechanism copper is price, not volume. So the question becomes not how the U.S. tariff will affect the demand for Peru’s copper, so much as how it will affect the global price of copper. 

Whatever happens with the price of copper going forward, will happen from a position of strength. Short-term, this strength has been at least partially caused by stockpiling, which began in late January, when the U.S. government first suggested that a tariff would be levied on copper imports. This stockpiling in preview of the tariff has driven copper prices over the past few months, and has also led to a significant gap between the Comex price of copper—reflecting copper inventories in the U.S.—and the LME price of copper. Now that a tariff rate and timeline have been determined, stockpiling is likely to continue, but only to the extent that cargo ships in transit to the U.S. are able to reach U.S. soil before August 1^st. Cargo ships in transit that are scheduled to arrive after August 1^st have reportedly already begun looking for alternative markets. Thus, stockpiling may continue to provide a degree of support to comex copper prices, but increasingly less so over time, and then ceasing completely after August 1^st.

Common sense dictates that the market dynamics for copper could change significantly after August 1^st. As stockpiling in the U.S. ceases, eliminating a (temporary) source of demand, the price of copper could be impacted.

The main risk for copper going forward, however, is not the end to stockpiling, perhaps, but the risk that overall U.S. tariff policies, and other policy disruptions in the U.S., cause a broader slowdown in the U.S., China and global economies, thereby affecting global demand for copper.

However, as we stated earlier, any change in the dynamics of the copper market will occur from a position of strength. Copper prices are significantly above their previous year’s levels, and are high in historic terms. Thus, there is plenty of room for a correction in the price of copper without imperiling Peru’s macroeconomic stability.

Additionally, Peru currently enjoys a record trade surplus (chart 4), which may diminish in line with softening copper prices, although without crossing the line into a trade deficit. There would need to be a much greater collapse in export prices and volume, for that to happen.

What may be affected, though, is domestic business confidence in Peru, judging from previous experience. Furthermore, the most macroeconomic balance that is most vulnerable to lower global copper prices, is the fiscal balance, given the high dependence of fiscal revenue on the mining sector.

As for the PEN, the strength it has been showing heretofore has been reliant on both high metal prices, and a weak global USD. An eventual correction in metal prices will soften current strong external account fundamentals, but the dynamics of the USD globally is a different matter altogether. In the end, the degree of impact on Peru’s economy will depend on the magnitude of change in global copper price dynamics due to the 50% tariff. And this is something very hard to predetermine.