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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

1

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.

-3

-2

-1

0

1

2

3

4

Paraguay Brazil Mexico Chile Costa Rica Peru Colombia Argentina

Q1 2011

Q2 2011

Q3 2011

GDP, q/q percent change, sa

2

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