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  • Global Economic Prospects June 2012 Latin America & the Caribbean Annex

    Overview

    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. 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 regions largest economy, slowed markedly to 2.7 percent in 2011, from 7.5 percent in 2010, on sharply slower investment growth and slowing private consumption growth. Growth in the Caribbean 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 on average 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 worlds 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 suggests 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 risk 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.

    Latin America & the Caribbean Region

    23

  • Global Economic Prospects June 2012 Latin America & the Caribbean Annex

    Recent economic developments

    LAC economies have recovered from the 2009

    slump

    Economic activity in most Latin American and

    Caribbean economies has recovered from the

    global economic crisis, with output gaps positive

    or close to zero (greater than -0.5 percent of

    potential GDP) in two thirds of the economies in

    the region. Regional industrial output1 in the first

    quarter of 2012 was in line with its long term

    trend level (figure LAC.1), with output in

    Colombia, Mexico, Peru, and Uruguay having

    recovered long-term trend levels, while

    industrial production in Argentina, Brazil, Chile,

    and Ecuador remains below long-term trend

    levels. Unemployment has fallen well below pre-

    crisis levels, in part a continuation of the

    downward trend established in the pre-crisis

    period. Several economies in the region have

    started to run against capacity constraints

    whether in terms of production capacity or labor

    force (figure LAC.2), which has been reflected

    in rising inflation or a slowdown in the pace of

    expansion.

    with annual growth decelerating in 2011 after

    robust performance the previous year

    Overall growth in the region eased to 4.3 percent

    in 2011 from a remarkable 6.1 percent post-crisis

    rebound in 2010 (table LAC.1). Growth

    decelerated the most in the fastest growing

    economies that had started to push against

    production capacity constraints and where fiscal,

    monetary and prudential tightening was most

    aggressive. Growth in South America eased 2

    percentage points to 4.6 percent, while growth in

    Central America (excluding Mexico) and the

    Caribbean (outside of Dominican Republic),

    which lagged behind the global cycle,

    accelerated marginally in 2011. Nevertheless

    growth in many countries in this part of the

    Table LAC.1 Latin America & the Caribbean summary forecast

    Source: World Bank

    Est. Forecast

    98-07a

    2009 2010 2011 2012 2013 2014

    GDP at market prices (2005 US$) b 3.1 -1.9 6.1 4.3 3.5 4.1 4.0

    GDP per capita (units in US$) 1.7 -3.0 4.9 3.0 2.2 2.8 2.7

    PPP GDP c 3.1 -1.6 6.1 4.5 3.4 4.1 4.0

    Private consumption 3.9 -0.8 6.0 5.1 3.6 4.0 3.8

    Public consumption 2.6 4.0 4.1 2.9 3.1 3.2 3.4

    Fixed investment 3.9 -10.2 12.8 8.6 6.6 8.3 8.0

    Exports, GNFS d 6.0 -9.7 11.4 6.2 5.6 6.4 6.6

    Imports, GNFS d 6.4 -14.8 22.3 9.7 7.6 8.1 8.0

    Net exports, contribution to growth -0.1 1.6 -2.7 -1.2 -0.8 -0.8 -0.8

    Current account bal/GDP (%) -0.9 -0.6 -1.3 -1.4 -1.9 -2.1 -2.4

    GDP deflator (median, LCU) 6.2 3.0 5.2 5.3 6.6 6.1 5.9

    Fiscal balance/GDP (%) -2.9 -3.9 -3.0 -2.6 -2.8 -2.5 -2.4

    Memo items: GDP

    LAC excluding Argentina 3.2 -2.1 5.8 3.9 3.6 4.1 4.0

    Central America e 3.4 -5.3 5.4 4.0 3.6 4.0 3.9

    Caribbean f 4.7 0.4 3.5 2.7 3.5 3.8 4.0

    Brazil 2.8 -0.3 7.5 2.7 2.9 4.2 3.9

    Mexico 3.3 -6.0 5.5 3.9 3.5 4.0 3.9

    Argentina 2.6 0.9 9.2 8.9 2.2 3.7 4.1

    (annual percent change unless indicated otherwise)

    a. Growth rates over intervals are compound average; growth contributions, ratios and the GDP deflator are averages.

    b. GDP measured in constant 2005 U.S. dollars.

    c. GDP measured at PPP exchange rates.

    d. Exports and imports of goods and non-factor services (GNFS).

    e. Central America: Costa Rica, Guatemala, Honduras, Mexico, Nicaragua, Panama, El Salvador.

    f. Caribbean: Antigua and Barbuda, Belize, Dominica, Dominican Republic, Haiti, Jamaica, St. Lucia, St. Vincent and

    the Grenadines, and Suriname.

    24

  • Global Economic Prospects June 2012 Latin America & the Caribbean Annex

    region remained relatively subdued. Panama was

    a notable exception, with growth accelerating

    markedly in 2011 to 10.6 percent, boosted by

    public works related to the expansion of the

    Panama Canal and the construction of the Metro,

    and by strong private consumption. Robust

    private consumption also supported growth in

    Guatemala, alongside stronger external demand.

    The Caribbean region has finally recovered from

    a two-year recession, but efforts to consolidate

    fiscal accounts in combination with negative

    terms of trade (notably higher oil prices), have

    kept growth in check. The economy of the

    Dominican Republic expanded at a robust 4.5

    percent pace in 2011, following a 7.8 expansion

    in 2010, supported by rapid growth in mineral

    output and a strong acceleration in free-zone

    manufacturing output. Elsewhere in the

    Caribbean, growth was supported by continued

    albeit subdued recovery of tourism, as high

    unemployment in high-income countries has

    held back tourist arrivals (up 3.6 percent in 2011

    and now 3.4 percent higher than pre-crisis

    levels) and tourist spending. In addition, there

    was a notable increase in activities in the mining/

    extractive sector. Haitis economy expanded at a

    5.6 pace in 2011, after the output collapsed in

    2010 following the devastating earthquake that

    struck in January 2010. The recovery was

    weaker than anticipated due to the slow p

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