Regional Economic Outlook (REO): Western Hemisphere - Northern Spring, Southern Chills, April 2015
Western Hemisphere, October 7, 2015
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- Published: October 7, 2015
- Series: Western Hemisphere
Executive summary and regional 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.
- Latin America and the Caribbean economic activity continues to decelerate at the regional level.
- Stronger U.S. growth should benefit countries with tighter links through trade, remittances, and tourism (Mexico, Central America, and the Caribbean).
- Weaker commodity prices for the foreseeable future will continue to hurt South America’s net commodity exporters, lowering national incomes, reducing investment, and worsening fiscal balances.
- These developments could impede progress made in recent years in poverty reduction.
- Key risks include an abrupt tightening of U.S. interest rates or a further slowdown in China, which may disproportionately affect Latin America.
Short- and medium-term outlook across subregions
- United States and Canada
- United States: Following a slow start in early 2015, recovery regains its footing underpinned by resilient consumption and labor markets.
- Canada: Continued to lose momentum in the wake of lower oil prices.
- Latin America and the Caribbean (LAC)
- Economic activity in 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.
- 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 risen to varying degrees, with retreating capital flows placing additional downward pressure on currencies and testing credibility of existing policy frameworks.
- Domestic headwinds owing to country-specific factors are 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, while 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.
Key chapters — findings and analyses
- Chapter 1: The United States, Canada, and the World: Outlook, Risks, and Policies
- Global growth remains modest and uneven.
- After a setback in early 2015, global activity rebounded but the growth outlook remains subdued over both short and longer horizons.
- 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 remain a priority, with investment and structural reform being crucial.
- Chapter 2: Outlook and Policy Challenges for Latin America and the Caribbean
- Identifies protracted slowdown and weaker fundamentals across LAC.
- Documents consequences of weaker commodity prices: deteriorated terms of trade, wider current account deficits, exchange rate depreciation, weaker investment.
- Stresses the importance of country-specific policy responses, fiscal and external sustainability, exchange rate flexibility, and structural reforms.
- Chapter 3: To Hike or Not to Hike: Is That an Option for Latin America? Assessing Monetary Policy Autonomy
- Quantifies likely impact and risks for domestic financial conditions in Latin America from Federal Reserve normalization.
- Explores the extent to which central banks in the region can keep rates aligned with domestic objectives.
- Discusses policies that can enhance monetary autonomy.
- Chapter 4: Trade Integration in Latin America and the Caribbean: Hype, Hope, and Reality
- Finds LAC is less open to trade than most other emerging market regions and many countries are "undertrading" given fundamentals.
- Strong performers penetrate large markets, including advanced economies, requiring higher productivity and competitiveness.
- LAC stands to benefit from deeper integration into global value chains, though direct short-term trade impact is likely to be small.
- Recommends trade agreements focus on raising global competitiveness and avoid creating regionally protected trade blocks.
- Chapter 5: Advancing Financial Development in Latin America and the Caribbean
- Access to financial institutions has expanded notably in the past decade; LAC compares favorably with other emerging market regions on this dimension.
- The region lags peers on broader financial development, especially regarding markets, with substantial heterogeneity across countries.
- Financial systems in many LAC countries appear underdeveloped relative to their macroeconomic fundamentals.
- Further financial development would likely convey net benefits provided there is adequate regulatory oversight to prevent excesses.
Policy recommendations and implications
- Use exchange rate flexibility to aid external adjustment.
- Net commodity importers can deepen fiscal adjustment to take advantage of lower commodity prices.
- Countries facing fiscal or external sustainability concerns should tighten policies further as appropriate to country circumstances.
- Raise potential growth through investment and structural reforms.
- Enhance monetary policy autonomy via appropriate policy tools and frameworks to mitigate spillovers from U.S. monetary normalization.
- Pursue trade policies and regional agreements that raise global competitiveness and facilitate integration into global value chains.
- Promote financial development with strong regulatory oversight to balance growth benefits and financial stability risks.
Source: Regional Economic Outlook (REO): Western Hemisphere - Northern Spring, Southern Chills, April 2015
Content in this bundle
- Resumo Analítico
- Regional Economic Outlook: Western Hemisphere - Adjusting Under Pressure; October 2015
- Perspectivas económicas: Las Américas - Ajustando bajo presión; Octubre de 2015
- Regional Economic Outlook: Western Hemisphere - Adjusting Under Pressure; October 2015
- Regional Economic Outlook: Western Hemisphere - Adjusting Under Pressure; October 2015
- Regional Economic Outlook: Western Hemisphere - Adjusting Under Pressure; October 2015
- Regional Economic Outlook: Western Hemisphere - Adjusting Under Pressure; October 2015
- Regional Economic Outlook: Western Hemisphere - Adjusting Under Pressure; October 2015
- Regional Economic Outlook: Western Hemisphere - Adjusting Under Pressure; October 2015
- Regional Economic Outlook: Western Hemisphere - Adjusting Under Pressure; October 2015
- Regional Economic Outlook: Western Hemisphere - Adjusting Under Pressure; October 2015
- Regional Economic Outlook: Western Hemisphere - Adjusting Under Pressure; October 2015
- Regional Economic Outlook: Western Hemisphere - Adjusting Under Pressure; October 2015
- Regional Economic Outlook: Western Hemisphere - Adjusting Under Pressure; October 2015