Mexican factories continue to remain the manufacturing growth leader in Latin America as Brazil and Argentina face declines that sour the outlook in the region, according to the Latin America Manufacturing Outlook, a semiannual report from the Manufacturers Alliance for Productivity and Innovation.

The report, authored by Fernando Sedano, 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 decline by 0.1 percent in 2014 and increase 1.8 percent in 2015. The former was revised downward from the 2 percent growth anticipated in MAPI’s July 2014 report while the latter is down from 2.1 percent.

“The export-oriented carmaking industry has been the growth engine in Mexico and there is now strong evidence that expansion across the industrial supply chain will occur in 2015,” Sedano said. “Brazil's economy is in stagflation mode – a mix of recession and inflation. Manufacturing activity decreased 6 percent year over year during the last six months and business and consumer confidence plummeted. Similarly, Argentina's manufacturing weakness is explained by a sharp retreat in car production, as domestic sales and exports to Brazil continue to decline. Argentina's economy is also in stagflation mode.”

In developing its forecast, MAPI uses data from national statistical agencies, assigning weighted average annual production indexes for each industry. The weights are determined by a country’s value-added in U.S. dollar terms in each sector, using MAPI’s proprietary econometric model.

Brazil’s manufacturing activity (48.7 percent of MAPI’s regional index) stopped growing four years ago and the country is at an economic crossroads. The government will need to make tough policy decisions to take the economy out of a slump, lower inflation, and address the deteriorating fiscal picture. With business sentiment at its lowest levels in a decade, it is not surprising to see plunging demand for durable industrial and capital goods.

MAPI forecasts Brazil will see 1.8 percent manufacturing decrease in 2014, down from 1.6 percent anticipated in the previous report, and 1.6 percent in 2015.

Mexico’s industry growth (38.7 percent of the index) increased by a relatively strong 3.4 percent in the first nine months of 2014, with the automotive sector, basic metals factories, and fabricated metal plants leading the way. Sedano anticipates 2.9 percent expansion in 2014 and 3 percent in 2015, due to the encouraging outlook for manufacturing in the United States driving up confidence among Mexico's manufacturing leaders.

Argentina’s manufacturing prospects (12.6 percent of the index) are troublesome. After reaching record-high car production in 2013, output fell an alarming 21.6 percent in the first 10 months of 2014 and tighter controls on imports are shaping numerous other industries. MAPI forecasts contractions of 2.4 percent in 2014 and 0.7 percent in 2015 compared with the previous forecast of 0.7 percent and 0.5 percent declines, respectively.

Six of the 14 industries reviewed are expected to grow in 2014, with one remaining flat; 12 should advance in 2015.

Three industries – food and beverages, motor vehicles and machinery and equipment – account for roughly 45 percent of the region’s manufacturing and are therefore most important to the forecast. Production of food and beverages – the largest industry in the region and one of the most stable – should grow by 1.8 percent in 2014 and 3.3 percent in 2015. The automotive sector is forecast to decline 1.9 percent this year and 3.2 percent next year. Machinery and equipment is forecast to see a decrease of 2.8 percent in 2014 2014 before a 1.8 percent advance in 2015.