Latin America is poised for what could be its fifth consecutive year of strong economic growth in 2008.
But inflation, after falling to a historic low for the region in 2006, is edging up in several countries, the IMF said in its Regional Economic Outlook for the Western Hemisphere, which it unveiled in São Paulo, Brazil, on November 9.
So far, Latin America and the Caribbean seem to have weathered the fallout from the global financial turbulence that has its roots in the decline in the U.S. housing markets. But the problems in financial markets, which began last summer, have “significantly increased downward risks” for the region, the IMF said in its semiannual report. The main sources of that risk include weaker external growth, with its attendant impact on commodity prices, and possible further tightening in U.S. and world credit markets.
Beyond the external conditions, the IMF said, the “sustainability” of the Latin American expansion will also depend on preserving “the strength of underlying fiscal positions” in the countries and “the resilience of domestic financial sectors.” The report noted that strong fiscal and external current account surpluses are beginning to shrink as public spending accelerates and imports rise.
Still, the overall message is “positive,” said Anoop Singh, Director of the IMF’s Western Hemisphere Department. “This is a recovery and a growth phase that is different from its predecessors” and is “not going to be terminated, we think, as prematurely as earlier ones” because of solid fiscal and monetary policies that make the region more resilient than it was in the past to changes in the external environment, Singh said at a briefing in Washington.
Overall, the IMF predicts that growth in the region will be about 5 percent in 2007, moderating to about 4¼ percent in 2008. The decrease next year reflects a less favorable external environment and capacity constraints in some countries.
Still, if developments turn out as expected, 2008 would be the fifth year in a row that growth has exceeded 4 percent, Latin America’s best performance in decades (see table).
While Latin America is resilient enough to deal with the current global financial turbulence and some slowdown in U.S. growth, it would be more seriously affected if there were a pronounced slowdown in the industrial countries, especially the United States, and a credit crunch in financial markets. If that downside scenario were to unfold in the coming months, with a further weakening of commodity prices, growth would slow significantly in Latin America’s economies, perhaps to as low as 2½ percent overall in 2008, nearly 2 percentage points below the baseline projection.
In a few countries, “energy shortages could also create risks to the growth outlook,” and many nations are facing food price shocks that heighten inflation risks. Overall, inflation in Latin America and the Caribbean is expected to rise from 5 percent last year to 5.4 percent this year and 5.7 percent next year.
The rising inflation reflects both the worldwide increase in food prices and growing aggregate demand as a result of the economic expansion. Because imports are growing faster than exports and commodity prices have stabilized, export earnings are no longer rising so rapidly. As a result, current account surpluses are weakening in most countries, the IMF said.
Meanwhile fiscal surpluses, which peaked in 2006, should decline to about 2 percent of GDP this year and 1¾ percent next, as revenues slow and government expenditures grow. “Unless the pace of spending growth is curbed, many countries in the region are likely to return to structural deficits in 2008,” the report warned.
The ongoing expansion has brought with it significant declines in both poverty and inequality, among the two most pressing long-term problems facing Latin America. Continuing reductions in both are linked to sustaining a rising trend in growth and productive investment—two areas in which, despite improvement, the region lags behind other emerging market economies. The regional outlook said that “to tackle persistent inequality and high poverty,” better targeting of social spending is essential, and the region is developing effective models for this purpose in its growing experience with conditional cash transfer programs.
Real GDP is expected to grow smartly in 2008 in Latin America and the Caribbean.
(real GDP growth, year-end to year-end, percent)1
|Latin America and the Caribbean||2.6||4.6||5.5||5.0||4.3|
Weighted by purchasing power parity.
Weighted by purchasing power parity.
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