Latin America's Recovery on Track but Long-Term Growth Weak

IMF News, October 13, 2017

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The Regional Economic Outlook Update for the Western Hemisphere projects growth of 1.2 percent in 2017 and 1.9 percent in 2018 for Latin America and the Caribbean.
A favorable external environment is supporting the recovery: global demand is strengthening and easy global financial conditions—low global market volatility and resilient capital inflows—are boosting domestic financial conditions.
Inflation dynamics:
- Inflation at the regional level is expected to decline to 4.2 percent in 2017 (from its peak of 6.2 percent in 2015).
- Inflation is expected to remain at about 3½ percent thereafter.
Long-term growth concerns:
- In the next 3-5 years, Latin America is projected to grow 1.7 percent in per capita terms.
- This projected per capita growth rate is almost identical to the region’s performance over the past quarter century and only marginally better than those in advanced economies, raising concerns about slow convergence to advanced-country income levels.

South America: After bottoming out in 2016, growth is gradually picking up.
- Argentina: recovering from last year’s recession and expected to grow by about 2½ percent in 2017 as investment firms up.
- Brazil: growth entered positive territory in the first half of 2017 and is expected to reach 0.7 percent for 2017 and 1.5 percent in 2018.
- Chile: growth in the first half of 2017 remained weak despite resilient household spending.
- Colombia: economic slowdown continues due to a permanent shock to commodity income and the tax reform.
- Venezuela: economy continues contracting for the fourth consecutive year and inflation is on the path to hyperinflation.
Mexico: economic activity remained solid in the first half of the year despite uncertainty about future trade relations with the United States.
Central America: economic activity, in aggregate, remains close to potential.
Caribbean: economic prospects are generally improving, but baseline projections reflect data available before the impact of Hurricanes Harvey, Irma, and Maria and do not include the devastating impact of these hurricanes on a number of countries in the region or the risk they pose to their growth outlook.

Domestic and external risks identified include:
- political, related to the uncertainty of policy stance following the elections that will take place in several countries;
- humanitarian, if the ongoing crisis in Venezuela deteriorates;
- financial, if global financial conditions tighten; and
- economic, if there is an abrupt adjustment in demand from China.
Additional longer-term risks: retreat from cross-border economic integration and natural disasters and climate change.

Fiscal policy and public debt:
- Limited room in the budget. The region’s public debt increased above the average level for emerging markets.
- Many countries would need to continue to lower their deficits to put public finances on a sustainable path.
Monetary policy:
- As inflation and inflation expectations decline and are at or below target ranges in many countries, central banks have been reducing their policy rates.
- Monetary policy can continue to play a more supportive role, particularly given the limited fiscal space and continued economic slack.
Structural reforms to lift incomes and support inclusive growth. Priorities include:
- closing infrastructure gaps;
- enhancing female labor force participation where it is still low;
- reducing labor market informality;
- investing in human capital to ensure broad-based access to high-quality education;
- improving governance and curbing corruption; and
- furthering regional trade and financial integration.

IMF Country Focus, October 13, 2017