- International Monetary Fund. Western Hemisphere Dept.
- Published Date:
- May 2010
© 2010 International Monetary Fund
Regional economic outlook : Western Hemisphere—[Washington, D.C.] : International Monetary Fund, 2010.
p. ; cm.—(World economic and financial surveys, 0258-7440)
“Taking Advantage of Tailwinds.”
Includes bibliographical references.
1. Economic forecasting—North America. 2. Economic forecasting—Latin America. 3. Economic forecasting—Caribbean Area. 4. Economic development—North America. 5. Economic development—Latin America. 6. Economic development—Caribbean Area. 7. Fiscal policy—North America. 8. Fiscal policy—Latin America. 9. Fiscal policy—Caribbean Area. 10. Capital movements—North America. 11. Capital movements—Latin America. 12. Capital movements—Caribbean Area. I. International Monetary Fund. II. Series (World economic and financial surveys).
HC94 .R445 2010
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This May 2010 issue of the Regional Economic Outlook: Western Hemisphere (REO) was prepared by a team led by Steven Phillips and Ana Corbacho under the direction of Rodrigo Valdés and Nicolás Eyzaguirre. This report reflects developments as of April 15, 2010. The team included Jorge Iván Canales-Kriljenko, Herman Kamil, Kornélia Krajnyák, Leandro Medina, Rafael Romeu, Bennett Sutton, and Secil Topak. Charles Kramer contributed Chapter 1, Gabriel Di Bella made contributions to Chapter 2, and Nicolás Magud, Aurelie Martin, Stephanie Medina Cas, Aditya Narain, and Sebastián Sosa contributed boxes. Patricia Attix, Leandro Medina, Breno Oliveira, Bennett Sutton, and Secil Topak provided research and production assistance. Lucía Castro and María S. Gutierrez also assisted in the production of the Spanish version. Martha Bonilla and Joanne Blake of the External Relations Department edited the manuscript and coordinated the production.
A multispeed global recovery is under way, with some emerging markets in the lead and the major advanced economies growing more slowly. The fragile recovery in most advanced economies is still dependent on extraordinary policy stimulus. In the United States, the drag from the global crisis will linger for some time, as the ongoing repair of balance sheets of households and the financial sector, coupled with continued weak labor markets, keep demand growth low. Risks to the U.S. growth outlook appear broadly balanced in 2010, but they are tilted downwards in 2011 as fiscal stimulus winds down.
The current macroeconomic setting already has favored a return to easy global financing conditions and high commodity prices—a situation that is likely to be sustained, but unlikely to be permanent. Policy interest rates of advanced economies will remain low for some time. With global financial markets already having recovered their appetite for risk, many emerging market countries will be facing very low borrowing costs. At the same time, the stronger growth of emerging market economies, particularly in Asia, will continue to support commodity prices.
The recovery in Latin America and the Caribbean is advancing faster than anticipated, but at different speeds across countries. Higher growth is projected in many of the commodity exporting countries that are most integrated with global financial markets. Elsewhere, the upswing is less vibrant, particularly where the drag from the slow recovery in advanced economies is protracted, as in tourism intensive economies. In some countries, slower projected growth reflects sectoral bottlenecks and other supply-side constraints, with trend output in some cases contracting.
For the commodity exporters with stronger ties to global financial markets, the challenge is to best manage the upswing of the business cycle amid favorable external conditions. This includes the need for resetting macroeconomic policies toward neutral ground, a task that is more immediate in countries where growth is on stronger footing. It will be especially important to phase out previous fiscal stimulus, to take some of the burden off monetary policy, allowing interest rates to move toward a neutral level more gradually than otherwise. For some of the other commodity exporting countries, policy challenges will be more structural, including avoiding the perils of fiscal procyclicality, anchoring macroeconomic policies, and regaining access to financial markets.
The weak recovery in the tourism intensive, commodity importing countries will pose a great challenge to policymakers, as elevated debt levels and limited access to financing impose difficult policy tradeoffs. Efforts to protect vulnerable groups and unlock growth potential through structural reforms should be priorities in the policy agenda. Other commodity importing countries are gradually recovering, boosted by higher exports, but inflows from remittances continue to contract. In many of these countries, the room for macroeconomic stimulus has been almost depleted and should be prudently saved for downside risk scenarios.
This Regional Economic Outlook discusses policy priorities for Latin America and the Caribbean region during the upswing. Chapter 1 analyzes the global background and the outlook for the United States and Canada in particular, emphasizing the implications for the other countries of the region. Chapter 2 focuses on the outlook for Latin America and the Caribbean.
Chapter 3 looks in depth at the challenges associated with easy external financial conditions—such conditions are a favorable development, but also bring risks. At the same time that it creates opportunities for deft public debt management and the financing of investment at less cost, cheap external financing raises the risk of a boom-bust cycle, potentially leading to surges in domestic demand, asset prices and credit, as well as current account deficits. The prospect for rising commodity export prices could add further to demand overheating. Whether these risks materialize will depend critically on policy responses: allowing significant exchange rate flexibility is important, as are fiscal discipline and macroprudential policies. Other types of policy responses, such as taxes on capital inflows, may help in complementing these approaches, though they have important limitations.