Regional Economic Outlook Update: Western Hemisphere
Regional Economic Outlook (REO)

Latin America and the Caribbean: Are Chills Here to Stay?

October 2016


Economic activity in Latin America and the Caribbean is expected to bottom out in 2016, before making a modest recovery next year. While weak external demand and persistently low commodity prices continue to weigh on the regional outlook, domestic developments have been the key driver of growth outcomes in some stressed economies. GDP is expected to contract by 0.6 percent in 2016 before recovering to 1.6 percent growth in 2017. Recurrent growth disappointments point to lower potential growth, underscoring the need for structural reforms to boost productive capacity, but these will take time to bear fruit. Exchange rate flexibility has served the region well and, with shifting global trends, should continue to serve as the first line of defense against adverse shocks. In many cases, the need for a contractionary monetary policy stance is no longer evident, with inflation and inflation expectations returning to target levels. With risks still on the downside, countries should use the improved global financial environment to rebuild their fiscal buffers while preserving critical capital expenditures and social outlays. Uncertainty concerning the duration of easy global financial conditions poses risks for the region, while financial and corporate sector vulnerabilities bear closer monitoring.