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

    Recent developments

    Growth in the Latin America and the Caribbean

    region is slowing after robust growth in the first

    half of 2011

    The economies of Latin America expanded at a

    pace near or above potential through the first

    half of 2011. Growth was particularly strong in

    South America, lifted by strong domestic

    demand, accommodative external financing

    conditions in the case of countries integrated

    with the global financial system, and high

    commodity prices in the case of commodity

    exporters. In many of these economies the output

    gaps were positive. Growth in Central America

    was more subdued, but accelerating supported

    by recovery in domestic demand, while stronger

    agricultural performance gave an additional

    impetus to growth in Mexico. In the Caribbean

    economies growth remained weak with the

    output gap still negative.

    Monetary, credit and fiscal policy tightening in

    countries where signs of overheating were

    apparent caused domestic demand growth to

    moderate. The slowing in domestic demand has

    coincided in some of the economies in the region

    with the softening in external demand causing

    sharper than expected deceleration in growth.

    Although through the first half of the year there

    have been little spillovers from the sovereign

    debt tensions in the peripheral Euro Area, the

    increased likelihood that the further deterioration

    in Euro Area’s sovereign debt crisis could freeze

    up capital markets has started to affect the

    financially integrated economies of Latin

    America, as reflected by developments in the

    equity and currency markets. Heightened

    uncertainty about the short-term economic

    outlook and increased financial market volatility

    have started to take their toll on consumer and

    business sentiment, dampening further domestic

    demand. Retail sales and import data show that

    the moderation in domestic demand is broadly-

    based across the region.

    …with momentum for both imports and exports

    slowing markedly...

    The strong performance in export revenues in the

    first part of the year, when a combination of

    strong external demand and high commodity

    prices boosted growth to more than 25 percent

    year-on-year, gave way to a marked slowdown

    in the third quarter on account of softer external

    demand from major trade partners, and declines

    in commodity prices. Oil and metals exporters,

    including Mexico, Ecuador, and Chile, saw some

    of the sharpest declines in export revenues

    growth on a quarter-on-quarter seasonally

    adjusted annualized rate or momentum basis

    (saar).1 The marked slowdown in Brazil’s GDP

    growth has also affected export revenues in

    countries that trade heavily with Brazil.

    Meanwhile Colombia benefitted from the partial

    recovery in external demand from Venezuela,

    and an improvement in bilateral relations.

    Against the backdrop of increased global

    uncertainty, the apparent soft-landing in China,

    weak performance in the Euro area, and

    relatively subdued demand in the United States

    external demand for the region’s exports has

    indeed weakened, with export volumes

    momentum decelerating to 1.4 percent in the

    third quarter (saar) from the 14 percent in the

    second quarter, before reaccelerating slightly

    into the year end.

    The contribution of net exports to growth has

    been less negative than the sharp deceleration in

    export volumes would suggest, due to a 4.6

    percent quarter-on-quarter (saar) contraction in

    imports in the third quarter, following rapid

    growth in the first two quarter of the year (18.7

    and 15.6 percent respectively), which attests to

    the marked moderation in domestic demand, in

    particular in investment. In the fourth quarter the

    contribution of net exports was positive as

    imports continued to decline at an accelerated

    pace (10.5 percent decline (saar) in the three-

    month to November) while export performance

    Latin America & the Caribbean Region


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

    improved modestly. Notwithstanding declining

    commodity prices and weak external demand

    trade balances in the region have improved in

    recent months, as import growth decelerated

    more sharply than export revenue growth.

    Reflecting moderating domestic demand, and to

    a some extent also weaker external demand,

    industrial production declined 2 percent and 1.8

    percent (saar) in the second and the third quarter

    after a robust 9.2 percent expansion in the first

    quarter. In Brazil, the policy-induced moderation

    in domestic demand in conjunction with a

    stronger currency and weaker external demand

    have caused industrial production to decline

    more than 8 percent from the peak reached in

    February 2011. In Mexico, the region’s second

    largest economy, growth in industrial sector

    eased in the third quarter to 2 percent quarter-on-

    quarter (saar) from robust 7.8 percent expansion

    pace in the first quarter, as growth in

    manufacturing has moderated. Industrial output,

    which is highly synchronized with developments

    in the U.S. industrial output, has dipped into

    negative territory in the three months to October,

    and output was 1.2 percent lower than the peak

    recorded in May. In other economies in the

    region domestic demand continues to expand at

    a robust pace as indicated by strong retail sales

    supporting industrial output growth. In the case

    of Colombia industrial production accelerated to

    5.6 percent in the three months to October (saar),

    up from 1.8 percent in the second quarter.

    Third quarter GDP data for some of the

    financially integrated economies in the region

    reveals the effects of policy-induced moderation

    in domestic demand as well as of weaker

    external demand (figure LAC.1). Brazil’s

    economic growth came to a halt in the third

    quarter, after growth decelerated to 0.7 percent

    quarter-on-quarter (sa) in the second quarter --

    down from 0.8 percent in the first quarter. The

    mild decline in GDP in the third quarter reflects

    the combined effects of fiscal and monetary

    policy tightening in the first part of 2011, the

    impact of a still strong real, and the impacts of

    the international financial turmoil since August

    2011. Weaker retail sales and a drop in business

    and consumer confidence in recent months

    suggest that domestic demand is slowing, due to

    the lagged effects of policy tightening in the first

    half of 2011.

    In Chile economic performance is also showing

    signs of moderating, with both domestic and

    external demand contributing to this moderation.

    Quarterly GDP growth slowed to 0.6 percent (sa)

    in the third quarter, from 1.4 percent in the first

    quarter. In contrast Peru’s economic

    performance remained robust through the third

    quarter, suggesting that there have been limited

    spillover from increased global uncertainty and

    softer external demand, in particular from China.

    Growth eased down marginally, to 1 percent sa

    in the third quarter, down from a very strong 1.7

    percent in the second quarter, fueled by robust

    growth in domestic-demand related sectors such

    as retail and housing, and despite weak

    performance in the industrial sector which

    suffered from weaker demand for Peru’s textiles

    from Europe and the United States. Domestic

    demand is starting to show signs of moderate

    deceleration, however, reflected in weakening

    import momentum. Similarly growth in

    Colombia has seen little impact from a more

    adverse external environment so far, with growth

    moderating only marginally in the third quarter

    to 1.7 percent quarter-on-quarter from a very

    strong 1.8 percent expansion in the second

    quarter. Growth has been supported by very

    robust domestic demand and very rapid credit

    growth. Unlike in other countries in the region,

    both industrial production and export volumes

    have held up in the third quarter expanding at a

    Figure LAC.1 Growth in Latin America and Carib-

    bean is decelerating

    Source: World Bank.









    Paraguay Brazil Mexico Chile Costa Rica Peru Colombia Argentina

    Q1 2011

    Q2 2011

    Q3 2011

    GDP, q/q percent change, sa


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

    3.8 and 9.4 percent annualized rate despite the

    disruptions to global demand and investment

    caused by the turmoil beginning in August


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