Regional Economic Outlook Update - Latin America and the Caribbean: Stuck in Low Gear; October 2017

Western Hemisphere, October 13, 2017

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Regional Economic Outlook Update - Latin America and the Caribbean: Stuck in Low Gear; October 2017

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• Published: October 13, 2017
• Series: Western Hemisphere

Introduction and Regional Assessment

• After disappointing growth over the past few years, economic activity in Latin America remains on track to recover gradually in 2017–18 as the global economy gathers steam and recessions in a few countries in the region come to an end.
• Long-term growth, however, remains weak, hampering income convergence toward advanced economy levels.
• Fiscal space to support demand is limited, particularly for commodity exporters.
• Monetary policy can play a supportive role because inflation has been moderating rapidly.
• Urgent structural reform priorities identified:
  • Closing infrastructure gaps.
  • Investing in human capital.
  • Encouraging female labor force participation.
  • Reducing labor market informality.
  • Enhancing governance and curbing corruption.
  • Furthering trade and financial integration.

Global Growth and Commodity Environment

• The pickup in global activity that started in 2016 has gathered further steam, particularly reflecting firmer domestic demand growth in advanced economies and in China and other large emerging market economies in the first half of 2017.
• Global financial conditions remain easy, but commodity prices are softer than in April, with the exception of metal prices.
• Global growth forecasts (October 2017 World Economic Outlook [WEO]):
  • 3.6 percent for 2017.
  • 3.7 percent for 2018.
  • These are 0.1 percentage point higher than in April.

Short- and Medium-Term Risks

• Short-term risks are broadly balanced; medium-term risks are skewed to the downside.
• Upside scenario:
  • Stronger confidence and favorable market conditions could spur pent-up demand.
• Downside risks:
  • High policy uncertainty could lead to a tightening of global financial conditions if market confidence and asset valuations falter.
  • In the medium term, risks include:
  • An inward turn of policies in advanced economies and increased protectionism.
  • A sharp slowdown in China.
  • Greater fallout from geopolitical conflicts.
• Commodity exporters, especially fuel exporters, are particularly hard hit as the adjustment to the loss in commodity revenues continues.

United States: Growth, Inflation, and Policy Context

• Growth projections:
  • 2.2 percent for 2017.
  • 2.3 percent for 2018.
  • These are, respectively, 0.1 and 0.2 percentage point lower than projected in April.
  • Changes mainly reflect downward revisions for early 2017 and changes in fiscal assumptions relative to the April forecast (which embedded a fiscal impulse of 1 percent of GDP between 2017 and 2019).
• Fiscal stance:
  • Projected to be broadly neutral in 2017 and tighter in 2018.
• Hurricanes Harvey, Irma, and Maria increase near-term uncertainties, including about the size and timing of rebuilding efforts.
• Inflation:
  • Consumer price inflation is projected to reach 1.8 percent in 2017 (compared with 2.7 percent in the April WEO), down from 2.2 percent in 2016.
  • Core personal consumer expenditure inflation is projected to rise more slowly, slightly exceeding 2 percent in 2019 before returning to 2 percent over the medium term.
  • Revisions reflect weak price pressures in recent months, including for cell phones and prescription drugs.
• Monetary policy:
  • Forecast assumes a somewhat more gradual normalization of the policy interest rate in the United States than projected in the April 2017 WEO.
  • With markets pricing in a more gradual normalization of US monetary policy, nominal yields on 10-year US Treasury bonds have declined since March 2017 (as of mid-September).
  • The US dollar weakened in real effective terms by over 7 percent from March to mid-September 2017, more than reversing its gains after the US election.
• Fiscal policy and tax reform:
  • Following a failure to reach agreement on health care reform, the administration and Congress shifted focus back to fiscal policy.
  • An agreement was reached in September to raise the debt limit and to continue to fund the government until December (as part of legislation to provide hurricane relief).
  • The administration has outlined broad plans for tax reform (goals include simplifying the personal income tax, increasing the standard deduction and child tax credit, eliminating the alternative minimum tax and estate tax, lowering pass-through and corporate tax rates, moving to a territorial system, allowing immediate write-off of new investments, and imposing a one-time, low tax rate on accumulated overseas profits).
  • Given uncertainties about details, the proposed tax reform is not incorporated into the IMF staff forecast.

Canada: Stronger Near-Term Performance

• Canada’s growth forecast for 2017 has been revised upward from 2.5 to 3 percent, owing to a stronger-than-expected growth outcome in the first half of 2017 and the authorities’ supportive cyclical policies.
• The economy expanded by an annualized rate of 4.5 percent in the second quarter, marking the strongest quarterly growth rate since 2011.
• Contributors to second quarter growth:
  • Household spending, buoyed by gains in employment and earnings.
  • Energy exports.
• Other indicators:
  • Business investment and non-energy exports showed further signs of recovery.
  • Housing activity slowed, with investment in residential structures declining by 4.7 percent in the second quarter, as local and federal governments tightened measures to cool the housing market.
• Monetary policy:
  • With the economy back in full swing and the output gap narrowing sharply, the Bank of Canada raised the policy rate twice this year to 1 percent.

International Monetary Fund, Regional Economic Outlook Update - Latin America and the Caribbean, October 2017

Content in this bundle

• Regional Economic Outlook: Western Hemisphere Department - Update; October 2017
  • Regional Economic Outlook: Western Hemisphere Department - Update; October 2017 (Markdown version)
  • Regional Economic Outlook: Western Hemisphere Department - Update; October 2017 (PDF)

References

• Latin America's Recovery on Track but Long-Term Growth Weak
• People's Republic of China and the IMF
• Canada and the IMF
• United States and the IMF
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• [October 2017 World Economic Outlook [WEO]](https://www.imf.org/en/publications/weo/issues/2017/09/19/world-economic-outlook-october-2017)