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Latin America: Recalculating Global Volatility


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Washington DC, June 12, 2012 -Having made a strong recovery from the global financial crisis of 2009, economic activity in Latin America and the Caribbean is once again facing external and domestic headwinds, says the Global Economic Prospects report.

Overall growth in the region eased to 4.3 percent in 2011, from a remarkable 6.1 percent post-crisis rebound in 2010. Growth in Brazil, the region’s largest economy, slowed markedly to 2.7 percent in 2011, from 7.5 percent in 2010, as growth of domestic demand, investment growth and private consumption eased. In the Caribbean, growth was supported by a continued, albeit subdued, recovery in tourism, and a notable increase in activity in the mining and extractive sectors.

Growth in the Central American region, which excludes Mexico, accelerated marginally, in part due to a marked acceleration in growth in Panama, due to the expansion of the Panama Canal, the construction of Metro system, and strong private consumption. Increased concerns about the worsening of the situation in the Euro area during May has caused market sentiment to deteriorate globally.

Increased financial tensions have driven up the price of risk, caused most currencies to depreciate against the U.S. dollar, and caused commodity prices and stock market indexes to decline markedly. This is in contrast to developments in early 2012, when improved sentiment in high-income Europe and the associated improvements in market expectations had prompted a robust rebound in capital flows, equity markets and regional currencies.

Outlook

The short-term outlook for Latin America and the Caribbean is clouded by a fragile and uncertain external environment, still high oil prices and capacity constraints in select economies. Due to resurgence in tensions in the high-income world the region is once again facing headwinds from marked declines in commodity prices and weaker capital flows. Consequently growth is expected to decelerate to 3.5 percent in 2012, before firming marginally to 4.1 percent and 4 percent in 2013 and 2014, respectively.

Growth in Brazil is projected at 2.9 percent in 2012, accelerating to 4.2 percent in 2013, and 3.9 percent in 2014, supported by more expansionary policies and increased investment ahead of the World Cup. Argentina is expected to record one of the sharpest slowdowns in the region, with GDP projected at 2.2 percent in 2012 (8.9 percent in 2011), and to grow below 4 percent in the 2013-2014 period. Growth in the Caribbean is expected to consolidate at 4 percent by 2014, due, in part, to improvements in labor markets in the United States.

The expected gradual recovery in the United States bodes well for Mexico, Costa Rica, El Salvador, and Haiti; countries that have strong industrial links to the world’s largest economy. It will also support remittances and tourism to Central America and the Caribbean.

Risks and vulnerabilities

Risks to growth in the region have shifted to the downside. Large fiscal deficits and public debts in high-income countries and very loose monetary policies suggest that capital flows will remain volatile in the next years, making the fine-tuning of macroeconomic policies challenging.

Euro Area

A sharp deterioration of conditions in the Euro area is one of the main risks to the Latin American and Caribbean economies. In such a scenario global demand could drop significantly, and commodity prices, remittances, tourism, finance, and consumer and business sentiment would be negatively affected, potentially causing regional output to decline relative to baseline by close to 4 percent. Countries that have fewer macroeconomic buffers could be particularly vulnerable in the face of a significant weakening in global demand.

Looking East

As the region, notably South America, is becoming increasingly reliant on exports to East Asia, particularly China, a hard-landing there could have important implications for export growth in the region.




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