## Western Hemisphere Regional Economic Outlook: Stunted by Uncertainty - October 2019

_Western Hemisphere, October 22, 2019_

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## Bibliographic details
- Authors: Uncertainty - October 2019window.dataLayer = window.dataLayer || []
- Published: October 22, 2019
- Series: Western Hemisphere

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### Outlook for Latin America and the Caribbean (LAC)
- Growth slowed from 1.0 percent in 2018 to 0.2 percent in 2019, with a tentative pick-up to 1.8 percent expected in 2020.
- External headwinds: sluggish global growth, subdued commodity prices, and volatile capital flows.
- Easier global financial conditions provide some respite.
- Domestic risks: policy uncertainty in some large LAC countries is a drag on growth; Venezuela’s economic and humanitarian crisis drives large migration flows within the region.
- Recovery hinge: a pickup in private consumption and investment anchored on a rebound in business and consumer confidence.
- Downside risks include: further falls in global growth and commodity prices; spikes in risk premiums; heightened domestic policy uncertainty; contagion from financial turmoil in Argentina; and natural disasters.
- Policy balance: support growth while rebuilding policy space. Fiscal consolidation to lower public debt remains a priority in several countries. Monetary policy can continue to support growth given the stable inflation outlook and well-anchored expectations. Corporate vulnerabilities require enhanced surveillance. Structural reforms should aim at greater openness to trade and investment, bolstering competitiveness, and addressing stringent labor market regulations.

### Capital Flows to LAC after the Commodities Super-Cycle
- After the end of the commodity super cycle in 2014, capital flows to the region have declined and their composition has become riskier, with a larger prominence of portfolio flows.
- Sensitivity of capital inflows to global financial conditions and growth differentials has increased, raising the likelihood of a sudden stop if regional growth falters and global financial conditions tighten.
- Empirical findings:
  - Countries with floating exchange rate regimes tend to experience shorter and less costly sudden stops in capital flows.
  - A tightening of monetary policy following a sudden stop episode is associated with a reduction in the duration of sudden stops and the ensuing deceleration in growth.
  - Tighter capital controls do not have statistically significant effects on the duration of sudden stops.

### Sovereign Spreads and Fiscal Consolidations
- Lower commodity prices, mediocre growth, and prolonged low global interest rates have contributed to rising public debt in many LAC countries.
- Financial markets’ perception of credit risk in LAC has deteriorated somewhat amid a more challenging external environment.
- Policymakers have announced fiscal consolidation measures aimed at reducing public debt and improving sovereign confidence, as measured by sovereign bond spreads.
- Using a new database on fiscal policy news for 2000–18:
  - Sovereign spreads decline significantly following news that fiscal consolidation measures have been approved by Congress, particularly in periods of high sovereign spreads or in countries under an IMF program.
  - Fiscal adjustment packages are more effective—leading to smaller output losses and larger reductions in the public debt-to-GDP ratio—when sovereign spreads significantly decline following the announcement.
  - These results provide direct evidence that credible consolidation efforts during fiscal stress are rewarded through confidence effects that mitigate the drag on economic activity after consolidation.

### Labor Market Dynamics and Informality over the Business Cycle in LAC
- Labor markets characterized by high informality, low female participation rates, and relatively rigid employment protection legislation.
- Informality is countercyclical and the formal/informal adjustment margin reduces the importance of the employment/unemployment margin (informality dampens the usual Okun’s coefficient relating unemployment to cyclical changes in GDP).
- Informality slows adjustment to shocks, with negative impact on growth.
- Correlates of higher informality: higher redundancy costs, cumbersome dismissal regulations, and high minimum wages.
- Aggregate participation rates move positively with GDP changes; however, there is some evidence that the female participation rate is countercyclical in recessions in LAC.

### Spillovers to Latin America from Growth Slowdowns in China and the United States
- China and the United States are projected to slow due to cyclical forces, population aging, and sluggish productivity growth; heightened trade and technology tensions could accelerate the near-term slowdown.
- Spillovers are larger for countries more exposed via trade, commodity prices, and financial flows.
- Quantified examples:
  - A temporary fall of 1 percentage point in China’s growth would reduce growth in Chile and Peru by 0.2–0.3 percentage points.
  - A similar 1 percentage point US growth shock would lower growth in Costa Rica and Mexico by 0.5 percentage points.
- Spillovers could be significantly larger if slowdowns in China and the United States also lead to tighter financial conditions in emerging market economies, including those in Latin America.

*Western Hemisphere Regional Economic Outlook: Stunted by Uncertainty - October 2019*

---

## Content in this bundle

- **Annex 1. Summary of Background Papers**
  - [Annex 1. Summary of Background Papers (Markdown version)](/-/media/files/publications/reo/whd/2019/october/english/annexbackground.pdf.md){rel="alternate" type="text/markdown"}
  - [Annex 1. Summary of Background Papers (PDF)](/-/media/files/publications/reo/whd/2019/october/english/annexbackground.pdf){rel="external" type="application/pdf"}
- **Capital Flows to Latin America in the Aftermath of the Commodities Super-Cycle**
  - [Capital Flows to Latin America in the Aftermath of the Commodities Super-Cycle (Markdown version)](/-/media/files/publications/reo/whd/2019/october/english/capitalflow.pdf.md){rel="alternate" type="text/markdown"}
  - [Capital Flows to Latin America in the Aftermath of the Commodities Super-Cycle (PDF)](/-/media/files/publications/reo/whd/2019/october/english/capitalflow.pdf){rel="external" type="application/pdf"}
- **Annex 1. Surges in Capital Inflows and Domestic Investment**
  - [Annex 1. Surges in Capital Inflows and Domestic Investment (Markdown version)](/-/media/files/publications/reo/whd/2019/october/english/capitalflowannex.pdf.md){rel="alternate" type="text/markdown"}
  - [Annex 1. Surges in Capital Inflows and Domestic Investment (PDF)](/-/media/files/publications/reo/whd/2019/october/english/capitalflowannex.pdf){rel="external" type="application/pdf"}
- **Welcome to a visually integrated Fund**
  - [Welcome to a visually integrated Fund (Markdown version)](/-/media/files/publications/reo/whd/2019/october/english/capitalflowspresentation.pdf.md){rel="alternate" type="text/markdown"}
  - [Welcome to a visually integrated Fund (PDF)](/-/media/files/publications/reo/whd/2019/october/english/capitalflowspresentation.pdf){rel="external" type="application/pdf"}
- **Whd Reo**
  - [Whd Reo (Markdown version)](/-/media/files/publications/reo/whd/2019/october/english/data.xlsx.md){rel="alternate" type="text/markdown"}
  - [Whd Reo (XLSX)](/-/media/files/publications/reo/whd/2019/october/english/data.xlsx){rel="external" type="application/vnd.openxmlformats-officedocument.spreadsheetml.sheet"}
- **Labormarket**
  - [Labormarket (Markdown version)](/-/media/files/publications/reo/whd/2019/october/english/labormarket.pdf.md){rel="alternate" type="text/markdown"}
  - [Labormarket (PDF)](/-/media/files/publications/reo/whd/2019/october/english/labormarket.pdf){rel="external" type="application/pdf"}
- **Labormarketannex**
  - [Labormarketannex (Markdown version)](/-/media/files/publications/reo/whd/2019/october/english/labormarketannex.pdf.md){rel="alternate" type="text/markdown"}
  - [Labormarketannex (PDF)](/-/media/files/publications/reo/whd/2019/october/english/labormarketannex.pdf){rel="external" type="application/pdf"}
- **Welcome to a visually integrated Fund**
  - [Welcome to a visually integrated Fund (Markdown version)](/-/media/files/publications/reo/whd/2019/october/english/labormarketpresentation.pdf.md){rel="alternate" type="text/markdown"}
  - [Welcome to a visually integrated Fund (PDF)](/-/media/files/publications/reo/whd/2019/october/english/labormarketpresentation.pdf){rel="external" type="application/pdf"}
- **Welcome to a visually integrated Fund**
  - [Welcome to a visually integrated Fund (Markdown version)](/-/media/files/publications/reo/whd/2019/october/english/outlookpresentation.pdf.md){rel="alternate" type="text/markdown"}
  - [Welcome to a visually integrated Fund (PDF)](/-/media/files/publications/reo/whd/2019/october/english/outlookpresentation.pdf){rel="external" type="application/pdf"}
- **Sovereign**
  - [Sovereign (Markdown version)](/-/media/files/publications/reo/whd/2019/october/english/sovereign.pdf.md){rel="alternate" type="text/markdown"}
  - [Sovereign (PDF)](/-/media/files/publications/reo/whd/2019/october/english/sovereign.pdf){rel="external" type="application/pdf"}
- **Sovereignannex**
  - [Sovereignannex (Markdown version)](/-/media/files/publications/reo/whd/2019/october/english/sovereignannex.pdf.md){rel="alternate" type="text/markdown"}
  - [Sovereignannex (PDF)](/-/media/files/publications/reo/whd/2019/october/english/sovereignannex.pdf){rel="external" type="application/pdf"}
- **Welcome to a visually integrated Fund**
  - [Welcome to a visually integrated Fund (Markdown version)](/-/media/files/publications/reo/whd/2019/october/english/sovereignpresentation.pdf.md){rel="alternate" type="text/markdown"}
  - [Welcome to a visually integrated Fund (PDF)](/-/media/files/publications/reo/whd/2019/october/english/sovereignpresentation.pdf){rel="external" type="application/pdf"}
- **Staff Paper**
  - [Staff Paper (Markdown version)](/-/media/files/publications/reo/whd/2019/october/english/spillovers.pdf.md){rel="alternate" type="text/markdown"}
  - [Staff Paper (PDF)](/-/media/files/publications/reo/whd/2019/october/english/spillovers.pdf){rel="external" type="application/pdf"}
- **Staff Paper**
  - [Staff Paper (Markdown version)](/-/media/files/publications/reo/whd/2019/october/english/spilloverspresentation.pdf.md){rel="alternate" type="text/markdown"}
  - [Staff Paper (PDF)](/-/media/files/publications/reo/whd/2019/october/english/spilloverspresentation.pdf){rel="external" type="application/pdf"}
- **Table 1econ**
  - [Table 1econ (Markdown version)](/-/media/files/publications/reo/whd/2019/october/english/table1econ.pdf.md){rel="alternate" type="text/markdown"}
  - [Table 1econ (PDF)](/-/media/files/publications/reo/whd/2019/october/english/table1econ.pdf){rel="external" type="application/pdf"}
- **Table 2fiscal**
  - [Table 2fiscal (Markdown version)](/-/media/files/publications/reo/whd/2019/october/english/table2fiscal.pdf.md){rel="alternate" type="text/markdown"}
  - [Table 2fiscal (PDF)](/-/media/files/publications/reo/whd/2019/october/english/table2fiscal.pdf){rel="external" type="application/pdf"}
- **Full Report**
  - [Full Report (Markdown version)](/-/media/files/publications/reo/whd/2019/october/english/text.pdf.md){rel="alternate" type="text/markdown"}
  - [Full Report (PDF)](/-/media/files/publications/reo/whd/2019/october/english/text.pdf){rel="external" type="application/pdf"}

---

## References

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- [Country Focus](https://www.imf.org/en/news/articles/2019/10/28/na102819-interview-with-alejandro-werner-on-latest-economic-developments-in-latin-america)

_Source: https://www.imf.org/en/publications/reo/wh/issues/2019/10/22/wreo1019_