Regional Economic Outlook (REO): Western Hemisphere - Northern Spring, Southern Chills, April 2015
Western Hemisphere, April 29, 2015
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- Published: April 29, 2015
- Series: Western Hemisphere
Global outlook and cross-cutting risks
- Global growth remained modest and uneven last year amid further downgrades in medium-term growth forecasts and a sharp decline in the price of oil.
- Prospects for advanced economies improved somewhat:
- The U.S. economy is projected to maintain robust growth.
- Cheaper oil and weaker currencies are expected to support recovery in the euro area and Japan.
- Growth is expected to ease in oil exporters and several major emerging market economies, including China.
- Risks:
- Risks around the global outlook have become more balanced, but key downside risks remain, including renewed geopolitical tensions, possible abrupt shifts in financial markets, and stagnation and low inflation risks in advanced economies.
Western Hemisphere — headline assessment
- Regional aggregate:
- Growth in Latin America and the Caribbean slowed to 1.3 percent in 2014.
- Regional growth is projected to decline for a fifth consecutive year in 2015, dipping below 1 percent.
- Drivers of heterogeneity:
- Weakness concentrated among South America's commodity exporters, where falling global commodity prices have compounded country-specific challenges.
- Growth projected to be steady or stronger for most of the Caribbean, Central America, and Mexico, supported by lower oil bills for importers and robust economic recovery in the United States.
- Core challenges examined in the report:
- Impact of lower commodity prices on fiscal and external positions.
- Drivers of the slowdown in investment.
- Role of economic diversification for longer-term growth prospects.
Chapter 1 — The United States, Canada, and the World: Outlook and Policy Challenges
- Main points:
- A substantial fall in oil prices will affect near-term pattern of growth: positively for the United States, negatively for Canada, and broadly neutral for the region as a whole.
- A stronger U.S. dollar has been helpful, but more volatile exchange rates also pose risks.
- Weaker expectations for medium-term growth in many emerging markets and advanced economies dampen current investment.
- Global and regional growth rates have been marked down, although risks are now more balanced than before.
- Key policy challenges:
- Raising actual and potential growth.
- Supporting rebalancing.
Chapter 2 — Outlook and Policy Challenges for Latin America and the Caribbean
- Macroeconomic performance:
- Growth in Latin America and the Caribbean slowed to 1.3 percent in 2014 and is projected to dip below 1 percent in 2015.
- Sources of weakness:
- Downturn in global commodity markets is an important drag on South America's economies.
- Country-specific factors, including weak private sector confidence in Brazil and the intensifying economic crisis in Venezuela, further weigh on regional growth.
- Structural and policy considerations:
- Evidence of economic slack remains limited, underscoring the presence of supply-side bottlenecks.
- Flexible exchange rates can play a critical role in adapting to tougher external conditions.
- Policymakers will need to:
- Ensure prudent fiscal positions.
- Keep financial sector vulnerabilities in check.
- Tackle longstanding structural problems to raise investment, productivity, and potential growth.
Chapter 3 — The Commodity Price Bust: Fiscal and External Implications for Latin America
- Fiscal implications:
- The recent sharp drop in commodity prices will have important implications for fiscal positions of Latin America's major economies.
- Several commodity exporters in the region will likely experience a significant and persistent drop in fiscal revenues, requiring some deliberate deficit reduction efforts.
- External implications:
- Historical evidence suggests deterioration in trade balances will be relatively moderate and short lived.
- External adjustment typically does not appear to be driven by a rise in noncommodity exports, but rather by acute import compression, especially in countries with more rigid exchange rate regimes and low export diversification.
- Policy implications:
- Need for deliberate fiscal consolidation where commodity revenue declines are persistent.
- Exchange rate flexibility and structural diversification matter for smoother external adjustment.
Chapter 4 — Recent Investment Weakness in Latin America: Is There a Puzzle?
- Stylized facts:
- After peaking in 2010–11, real investment has decelerated in Latin America and the Caribbean (LAC), in line with developments in other emerging markets.
- Coming down from cyclical highs, investment ratios are still above historical averages in most countries in the region.
- Main drivers of investment slowdown:
- The sharp decline in commodity export prices is identified as the main driver behind the investment slowdown in Latin America.
- Lower current cash flows and expected profitability, and increased corporate leverage at the firm level have also played a role, though to a more limited extent than elsewhere.
- Outlook and policy message:
- Given the subdued outlook for many key drivers of corporate capital spending, a robust investment recovery in Latin America seems relatively unlikely unless policymakers can make decisive progress in improving conditions for private investment.
Chapter 5 — Long-Run Growth in Latin America and the Caribbean: The Role of Economic Diversification and Complexity
- Diagnosis:
- Economic diversification and complexity—relating to the range of products that a country produces and how sophisticated these products are—matter for long-term growth.
- Latin America and the Caribbean (LAC) have not been able to benefit significantly from these levers so far.
- Diversification and complexity remain relatively low, and dynamics over the last decade have not been encouraging.
- Interaction with other constraints:
- Benefits of diversification and complexity can be undermined by shortcomings in other areas (for example, macroeconomic instability), consistent with historical experiences in the region.
- Policy priorities:
- Prioritize structural reforms.
- Harness knowledge spillovers from greater openness.
- Preserve sound macroeconomic frameworks to improve longer-term growth prospects.
Regional Economic Outlook (REO): Western Hemisphere - Northern Spring, Southern Chills, April 2015
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