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International Monetary Fund. Western Hemisphere Dept.

Abstract

The economic recovery is under way, with upward revisions to global growth as financial markets normalized faster than expected and policy stimulus took effect. The upswing in advanced economies is still muted and dependent on policy support. In contrast, many emerging markets are experiencing a more vigorous upswing amid easy financing conditions and rising commodity prices.

International Monetary Fund. Western Hemisphere Dept.

Abstract

The global economy is emerging from recession, but the recovery is expected to be sluggish. While financial conditions have continued to improve, many markets remain highly dependent on public support, and downside risks prevail. In the United States and many advanced economies, growth and employment will remain weak in coming years. In turn, Canada has shown comparative resilience despite sizable shocks. A permanent loss in potential output, weak private consumption, and much higher debt levels in the United States will be negative legacies of the crisis that could adversely affect the Latin America and Caribbean region.

International Monetary Fund. Western Hemisphere Dept.

Abstract

Global activity has slowed, and the expansion has become more uneven with increasing downside risks, accompanied by bouts of global financial market volatility. Although the transient factors that contributed to the slowdown in the first half of the year will dissipate, the loss of confidence associated with perceived policy paralysis in many advanced economies along with deepening balance sheet fragilities will hold back growth going forward. These factors have already unnerved markets in recent weeks. Growth in emerging economies has thus far been somewhat more resilient, though there are increasing signs of moderation as global financial conditions have deteriorated.

International Monetary Fund. Western Hemisphere Dept.

Abstract

The LAC region is doing considerably better than in past crises, but there is growing heterogeneity within the region. External shocks to remittances and tourism are still playing out and will continue to affect countries in Central America and the Caribbean. In contrast, some of the larger economies have already bottomed out. These varying output dynamics, coupled with differing room for policy maneuver, are shaping policy challenges in the near term. In addition, long-lasting legacies from the global crisis will have significant implications for the region.

International Monetary Fund. Western Hemisphere Dept.

Abstract

Growth during the first half of 2011 was robust, supported by easy external financing, favorable terms of trade for commodity exporters, and lingering effects of past accommodative policies. However, the shift in the global economic environment and bouts of market volatility pose major challenges for policymakers. Although the slowdown in advanced economies is projected to have a moderate effect on growth in most countries, large downside risks to the outlook loom. In this context, policymakers should remain vigilant to overheating, and rebuild policy buffers used during the global crisis, since a rapid shift in global sentiment may require more supportive policies. In a downside scenario, monetary policy should be the first line of defense for countries with credible frameworks, while fiscal easing should be utilized only if severe downside risks materialize. Prospects are weaker in countries with closer links with advanced economies and limited policy space.

International Monetary Fund. Western Hemisphere Dept.

Abstract

The Latin America and Caribbean region is recovering from the crisis somewhat faster than previously anticipated. However, the speed of recovery and the associated policy challenges differ markedly across countries. For some of the larger commodity exporters, a favorable external environment and a strong rebound in domestic demand are boosting growth. Challenges ahead include managing the upswing of the economic cycle and adjusting to easy external financial conditions. In contrast, for some of the smaller commodity importers, challenges will likely be shaped by continued sluggish activity, particularly in countries more reliant on tourism and constrained by high debt levels.

International Monetary Fund. Western Hemisphere Dept.

Abstract

Although easy external financial conditions are overall good news for emerging markets, they come with risks that need to be managed. Past episodes of easy conditions often have led to sustained accelerations of domestic demand and significant real appreciation in emerging market countries, sometimes also accompanied by fast credit growth. Importantly, responses to easy conditions have varied in degree, reflecting differences in policies as well as structural features. With interest rates of major advanced economies and global risk aversion both likely to remain low for a sustained period, the challenge for policymakers is to conduct macroeconomic and prudential policies that make the most out of the enhanced financing possibilities while reducing the likelihood of boom-bust cycles. Policies on many fronts will be relevant, with exchange rate flexibility, fiscal policy, and macroeconomic prudential regulation being among the most important in insulating against unwanted demand and credit booms.

International Monetary Fund. Western Hemisphere Dept.

Abstract

As a net commodity-exporting region, Latin America—and especially South America—has significantly benefited from the commodity price boom of recent years. At the current juncture, however, uncertain global economic prospects have raised questions about its vulnerability to a sharp fall in commodity prices and the policies that can shield it from such a shock. This chapter examines the region’s commodity dependence and the history of commodity price busts in the last four decades to address these questions. Despite shifting trade structures in some countries, Latin America is—on average—as reliant on commodities today as 40 years ago. With commodities responding sensitively to global output fluctuations, the region is particularly vulnerable to a global economic slowdown. However, we find evidence that policies in the run-up of sharp terms of trade drops—especially when those are preceded by booms—play an important role in shaping the economic impact. Limited exchange rate flexibility, a weak external position, and loose fiscal policy tend to amplify the negative effects of these shocks on domestic output. Financial dollarization also appears to act as a shock “amplifier.” With improved fundamentals in many of these dimensions, the region appears to be better placed to withstand a turnaround in commodity prices today than in the past.

International Monetary Fund. Western Hemisphere Dept.

Abstract

Although it has faced larger external shocks this time, the Latin America and Caribbean (LAC) region has fared noticeably better than in the earlier three global downturns since the 1980s. It has also fared better than other emerging markets. This better performance can be attributed to stronger and more credible policy frameworks, which led to lower banking, external, and fiscal vulnerabilities and allowed some LAC countries to react with monetary or fiscal policy easing.

International Monetary Fund. Western Hemisphere Dept.

Abstract

The global crisis put fiscal policymaking at the forefront, highlighting differences in policy frameworks and preparedness within the region. Countries' circumstances prior to the crisis, largely reflecting past fiscal behavior, shaped the varied fiscal policy responses that Latin American and Caribbean (LAC) governments have recently taken. The experience of 2009 confirms that some LAC governments do have “space” to support economic activity during a major downturn. But the experience also draws attention to limits on such space, as well as the need for fiscal policymaking and frameworks to evolve—to be prepared for future shocks.