Western Hemisphere Region

Adjusting Under Pressure

October 2015

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See also Executive Summary in Portuguese
Western Hemisphere Regional Economic Outlook

Economies in the Western Hemisphere are generally seeing a slowdown in growth. The U.S. economy regained momentum after a slow start at the beginning of the year, while in Latin America and the Caribbean economic activity continues to decelerate at the regional level. Stronger U.S. growth should benefit countries in the region, especially those with tighter links through trade, remittances, and tourism (Mexico, Central America, and the Caribbean). Weaker commodity prices for the foreseeable future, however, will continue to hurt South America’s net commodity exporters—lowering national incomes, reducing investment, and worsening fiscal balances. These developments could, in turn, impede progress made in recent years in poverty reduction. Key risks, including an abrupt tightening of U.S. interest rates or a further slowdown in China, may disproportionately affect Latin America. Chapters in this report examine monetary policy in Latin America, including the region’s exposure to global financial shocks; the role of value chains and regional trade agreements in fostering trade integration; and the state of financial market development in the region.


Front Matter

Chapter 1: The United States, Canada, and the World: Outlook, Risks, and Policies
Global growth remains modest and uneven. Following a setback in early 2015, the pace of global activity rebounded but the growth outlook remains subdued over both short and longer horizons. Western Hemisphere economies figured prominently in these developments and trends. In the United States, following a slow start this year, renewed momentum in the recovery was underpinned by resilient consumption and labor markets, but Canada continued to lose momentum in the wake of lower oil prices. Elsewhere, regional growth will turn slightly negative, against a backdrop of weaker commodity prices, tightening financial conditions, domestic headwinds, and dampened medium-term prospects. Risks to the outlook are tilted to the downside, including possible stagnation in advanced economies coupled with reduced potential growth in emerging markets. Policies to raise potential thus remain a priority in many economies, with investment and structural reform being crucial, including within the region. Read more...

  • Setback and Rebound
  • The United States: Recovery Regains Its Footing
  • Canada: Lower Oil Prices Weigh Heavily on the Economy

Chapter 2: Outlook and Policy Challenges for Latin America and the Caribbean
Economic activity in Latin America and the Caribbean (LAC) is undergoing a protracted slowdown, in tandem with weaker underlying fundamentals. Growth is projected to decline again in 2015, turning negative before rebounding modestly in 2016. Externally, renewed weakness in commodity prices has further deteriorated the region’s terms of trade, reflected in widening current account deficits, exchange rate depreciation, and weakening investment. Financial market strains have also risen to varying degrees, with retreating capital flows placing additional downward pressure on currencies, thus testing the credibility of existing policy frameworks. Domestically, headwinds to growth owing to country-specific factors are also mounting. Policy responses depend on country circumstances, including the depth of the downturn and degree of domestic rigidities. Some countries have already embarked on policy adjustment, but others will need to tighten policies further to address fiscal or external sustainability concerns. Net commodity importers can use the breathing room from lower commodity prices to deepen fiscal adjustment. Exchange rate flexibility remains instrumental for external adjustment, while structural reforms are crucial to address low trend growth. Read more...

  • Protracted Slowdown
  • Financially Integrated Economies
  • Other Commodity Exporters
  • Central America and the Dominican Republic
  • The Caribbean
  • Annex 2.1. Data Disclaimer

Chapter 3: To Hike or Not to Hike: Is That an Option for Latin America? Assessing Monetary Policy Autonomy
While Latin America experiences a sharp economic slowdown, a stronger U.S. economy is setting the stage for the Federal Reserve to continue normalizing its monetary stance. This chapter quantifies the likely impact and possible risks for domestic financial conditions in Latin America, and explores to what extent its central banks will be able to keep rates aligned with domestic objectives. It also sheds light on the policies that can serve to enhance monetary autonomy in the future. Read more...

  • Co-movement in Financial Conditions: A First Glance
  • From Global Financial Conditions to Domestic Interest Rates: Quantifying the Linkages
  • What Can Latin America Expect from U.S. Monetary Policy Normalization?
  • Conclusion and Policy Implications
  • Annex 3.1. Technical Details

Chapter 4: Trade Integration in Latin America and the Caribbean: Hype, Hope, and Reality
Latin America and the Caribbean (LAC) is less open to trade than most other emerging market regions. This chapter finds that most of the countries in the region have been "undertrading" given fundamentals, despite efforts by a number of them to open up to trade. Strong performers have been able to penetrate large markets, including advanced economies, which requires higher levels of productivity and competitiveness. LAC stands to benefit from deeper integration into global value chains, although we find that the direct short-term trade impact is likely to be small. Finally, trade agreements should focus on raising global competitiveness, and avoid the creation of regionally protected trade blocks. Read more...

  • Setting the Stage
  • Is LAC Undertrading? A More Formal Analysis
  • Heterogeneity in LAC
  • The Role of Value Chains and Regional Trade Agreements
  • Policy Takeaways

Chapter 5: Advancing Financial Development in Latin America and the Caribbean
In recent years, many Latin American and Caribbean (LAC) countries have made significant efforts to develop their financial systems. This chapter examines the current state of financial development in the region, as well as implications for potential growth and stability from further development. The analysis suggests that access to financial institutions has expanded notably in the past decade, and LAC compares favorably with other emerging market regions on this dimension. Nonetheless, the region continues to lag behind peers on broader financial development, especially with respect to markets, though there is substantial heterogeneity across countries. Moreover, financial systems in many LAC countries appear underdeveloped relative to their macroeconomic fundamentals. From today’s vantage point, therefore, further financial development would likely convey net benefits to the region, provided there is adequate regulatory oversight to prevent excesses. Read more...

  • Measuring Financial Development
  • Financial Development: Where Does LAC Stand?
  • Financial Development and Macroeconomic Fundamentals
  • The Nexus between Finance, Stability, and Growth: What Is in Store for LAC?
  • Conclusions and Policy Implications
  • Annex 5.1. Sources and Data Processing

List of Country Abbreviations


New Publications from the Western Hemisphere Department