- International Monetary Fund. Western Hemisphere Dept.
- Published Date:
- November 2006
©2006 International Monetary Fund
Regional economic outlook : Western Hemisphere -- [Washington, D.C] : International
Monetary Fund, 2006
p. cm. -- (World economic and financial surveys)
Includes bibliographical references.
1. Economic forecasting -- North America. 2. Economic forecasting -- Latin America. 3. Economic forecasting -- Caribbean Area. 4. North America -- Economic conditions. 5. Latin America -- Economic conditions. 6. Caribbean Area -- Economic conditions.
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This Regional Economic Outlook was written by Benedict Clements, Roberto Benelli, Christopher Faircloth, Jorge Roldós, and Jeromin Zettelmeyer, under the direction of Caroline Atkinson and Anoop Singh, with contributions from Lisandro Abrego, Max Alier, Trevor Alleyne, Rodolphe Blavy, Marcello Estevão, Roberto García-Saltos, Alejandro López-Mejía, Evridiki Tsounta, and James Walsh, and support from economists in the IMF’s Western Hemisphere, Monetary and Capital Markets, and Research Departments. Thomas Duffy, Angelo Alexander, Takahiro Atsuta, Priyadarshani Joshi, and Joy Villacorte provided research and production assistance.
In the context of a still broadly favorable global environment, the economic outlook for the Western Hemisphere remains strong. Despite tighter monetary conditions, global growth is expected to be around 5 percent in 2006 and 2007, as a deceleration of growth in the United States to about 2½ percent in 2007 is offset by higher growth in the euro area and Japan, and continued high growth in emerging Asia. The Latin America and the Caribbean (LAC) region is expected to grow by 4¾ percent in 2006—making the ongoing expansion the most vigorous for some decades—and by about 4¼ percent in 2007. Domestic demand in the LAC region is buoyant, driven both by higher public spending, and private consumption and investment. Inflation has generally remained subdued and is expected to decline moderately further, to a regional average of about 5 percent in 2007.
However, there are clear downside risks to the outlook. They include: a possibly sharper slowdown in U.S. growth; unexpected tightening of global financial markets; commodity price volatility, particularly sharply lower nonoil commodity prices; and trade pressures following the erosion of preferential access in the Caribbean and lack of progress on agreements to liberalize trade further.
This expansion compares favorably to previous upswings in Latin America. External current accounts and primary fiscal balances are in surplus, exchange rates are more flexible, inflation is much lower, and the structure of public debt is safer, with lower shares of short-term and foreign currency debt in most large countries. However, some vulnerabilities remain. Public debt is still relatively high. Budgets are generally rigid in the sense that a large proportion of expenditures is mandatory and a large share of revenues is earmarked. Government spending has recently accelerated, even in countries in which surpluses are being driven by cyclical or temporary factors, and despite the vigorous momentum of aggregate demand. Public revenue remains low in some countries, particularly in light of social needs. And, while not yet a source of concern in most countries, high real credit growth requires close monitoring.
To entrench macroeconomic stability, raise growth, and help countries move toward investment grade ratings, country reform agendas will need to confront these vulnerabilities, and to address the longstanding causes of crises in the region, including high inequality. Both greater equity and stability will improve the prospects for sustaining the current expansion. Making societies more equitable is inherently a slow and difficult process. Nonetheless, policy levers exist that could be used more, including fiscal reforms encompassing both the tax system and public expenditures; labor market policies; and other reforms that extend public services and economic opportunity to disenfranchised groups. Matching such reforms with greater efforts to make Latin American economies more open and competitive, with stronger institutions, will lead to more vibrant and successful economies. Achieving lasting improvements in these areas will require building constituencies that support reform, raising the level of human capital in the region, and enhancing the quality of policymaking.