Front Matter

Front Matter

International Monetary Fund. Western Hemisphere Dept.
Published Date:
April 2012
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© 2012 International Monetary Fund

Cataloging-in-Publication Data

Regional economic outlook. Western Hemisphere. – Washington, D.C. : International Monetary Fund, 2006–

  • v. ; cm. — (World economic and financial surveys, 0258-7440)

  • Once a year.

  • Began in 2006.

  • Some issues have thematic titles.

1. Economic forecasting – North America – Periodicals. 2. Economic forecasting – Latin America – Periodicals. 3. Economic forecasting – Caribbean Area – Periodicals. 4. North America – Economic conditions – Periodicals. 5. Latin America – Economic conditions – 1982– Periodicals. 6. Caribbean Area – Economic conditions – Periodicals. 7. Economic development – North America – Periodicals. 8. Economic development – Latin America. 9. Economic development – Caribbean Area. I. Title: Western Hemisphere. II. International Monetary Fund. III. Series: World economic and financial surveys.

HC94.A1 R445

ISBN 978-1-61635-253-0

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This April 2012 Regional Economic Outlook: Western Hemisphere was prepared by a team led by Luis Cubeddu and Charles Kramer under the overall direction of Nicolás Eyzaguirre and the guidance of Miguel Savastano. The team included Gustavo Adler, Sebastián Sosa, Camilo E. Tovar, and Evridiki Tsounta. In addition, Eric Le Borgne, Paulo Medas, and Martin Sommer contributed to Chapter 1; Alexandra Peter contributed to Chapter 2; and Francesco Columba, Kevin Greenidge, Geoff Keim, Ruy Lama, Juan Pablo Medina, Garth Nicholls, and Jose Daniel Rodriguez-Delgado contributed boxes. Excellent research assistance was provided by Bennett Sutton, Alejandro Carrión, Andresa Lagerborg, and Anayochukwu Osueke. Production assistance was provided by Patricia Delgado Pino and Luke Lee; Joe Procopio of the External Relations Department edited the manuscript and coordinated the production. This report reflects developments through April 16, 2012.

Executive Summary

The global economic environment is stabilizing, but remains weak. Positive economic news in the United States and policy action in Europe in recent months eased market stress. However, remaining strains and Europe’s slowdown are expected to weigh on global activity going forward. Meanwhile, in emerging markets, growth is still robust, with most economies operating near potential. On balance, global output is expected to expand by about 3¼ percent in 2012, a markdown of about ½ percent from the IMF’s September forecasts.

Downside risks continue to dominate. In the near term, renewed bouts of financial stress in the euro area could accelerate bank deleveraging, disrupt markets, and hit activity, both in Europe and beyond. Also, geopolitical tensions in the Middle East could drive up oil prices, dampening global demand as well as nonoil commodity prices. Over the medium term, persistent fiscal imbalances in the U.S. and Japan could unsettle financial markets if unaddressed, while a hard landing in China could downshift global growth and trigger a rout in commodities prices.

Notwithstanding the higher volatility, external conditions remain stimulative for much of Latin America, and are likely to persist for some time. Monetary policies in advanced countries are apt to remain accommodative for an extended period, given sluggish growth, high unemployment, and fiscal drags—in turn, implying that external financing for the region will continue to be abundant and cheap. Meanwhile, sustained demand from emerging Asia will support commodity prices, keeping terms of trade high for South America’s commodity exporters. That said, conditions will remain less favorable for Central America and the Caribbean, where external demand is more strongly linked to advanced economies. Countries with financial ties to Europe need to remain vigilant. However, spillovers would be mitigated by the fact that most European bank subsidiaries operating in the region are well capitalized and domestically funded.

Growth in much of the region remains robust, though moderating on account of earlier policy tightening, the end of the post-crisis rebound, and global uncertainties. In this context, the task for many countries remains to rebuild policy space.

  • The financially integrated commodity exporters should take advantage of favorable external conditions—which are expected to last for a while, but not forever—to continue reining in public debt, in order to allow due flexibility for monetary policy, and preserve hard-won fiscal credibility. Central banks should remain watchful of liquidity conditions, which could be disrupted by further bouts of global financial stress. Meanwhile, exchange rate flexibility should be preserved to buffer shocks, while macroprudential policies can address financial excesses.

  • A number of other commodity exporters need to end procyclical policies, which are exacerbating overheating pressures, eroding buffers, and weakening the balance of payments.

  • Countries in Central America, which are operating near potential and have debt-to-GDP ratios above precrisis levels, should redouble efforts to consolidate their fiscal positions, while strengthening monetary and prudential frameworks.

  • Many Caribbean countries will have to remain focused on working down fiscal overhangs and addressing financial fragilities, given the threats they pose to stability.

This edition of the Regional Economic Outlook features three short analytical notes on the effects of global financial shocks, spillovers from the largest economies in the region, and credit and housing dynamics. The main findings are:

  • Sustainable external positions and exchange rate flexibility hold the key for emerging markets to lessen the adverse effects of global financial shocks on economic activity. In Latin America, improved fundamentals have made economies less sensitive to these external shocks in recent years.

  • Spillovers from Brazil are significant for selected South American partners, but not for others. These spillovers take place through the transmission of “homegrown” shocks in Brazil and through Brazil’s amplification of global shocks. In contrast, Central America’s linkages with Mexico are very weak.

  • Rapidly growing mortgage credit does not appear to pose imminent risks to stability in the region. However, this assessment is hampered by a serious lack of quality data, pointing to an urgent need to close information gaps and strengthen oversight of the housing sector.

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