Growth in Latin America and the Caribbean is expected to decline for a fifth consecutive year to below 1 percent in 2015, although there are clear differences along North-South lines, the IMF said in its latest regional forecast.
The IMF’s Regional Economic Outlook for the Western Hemisphere projects growth in Latin America and the Caribbean at 0.9 percent in 2015, down from 1.3 percent in 2014.
Near-term prospects remain “fairly dim” for South America, the IMF says, with output contractions projected in three of the largest economies for 2015—Argentina, Brazil, and Venezuela—while only Chile and Peru would see a pick-up in growth.
In contrast, growth is projected to be steady in Central America and the Caribbean, and strengthen in Mexico, thanks to lower oil bills for importers and robust economic recovery in the United States.
For 2016, the IMF predicts that regional growth will make a modest recovery to 2 percent.
Outlook Still Uncertain
The Regional Economic Outlook draws attention to the downside risks that could further complicate the outlook for Latin America.
The IMF warns that any further weakness in commodity prices—perhaps related to a sharper downturn in China—would increase pressures on South America’s net commodity exporters. At the same time, financial risks have increased, following a long period of strong capital inflows and credit growth regionally and low interest rates globally.
Faster-than-expected growth in the U.S. would benefit its closest trading partners in the region, notably in Central America and Mexico, but could lead to faster normalization of U.S. monetary policy than currently anticipated, according to the report.
Continued weakness in regional economic activity also heightens the risk of domestic policy missteps, particularly attempts to stave off a structural slowdown with excessive policy stimulus, the IMF said.
Divergent Trends
Growth dynamics among the region’s financially integrated economies—Brazil, Chile, Colombia, Mexico, Peru, and Uruguay—are expected to diverge over the period ahead, reflecting differentiated exposures to global commodity markets and other country-specific factors.
Brazil is experiencing the most serious economic downturn in more than two decades, with output expected to fall by 1 percent in 2015. Mexico, the second largest economy in the region, faces a comparatively favorable outlook with growth expected to expand by 3 percent this year, the report said.
Among the other financially integrated economies, Chile, Colombia, and Peru are all facing headwinds from lower commodity export prices and the related cuts to corporate investment. However, strong macroeconomic fundamentals provide an important buffer.
The IMF says that economic conditions in some of the other (less financially integrated) commodity exporters of South America are particularly challenging. Venezuela fell into a recession in early 2014 and is expected to severely contract by 7 percent in 2015. In Argentina, exchange rate pressures have recently eased, however output is still projected to decline modestly in 2015, further extending last year’s slowdown.
Policy Options
Despite the pronounced slowdown over the past several years, economic slack remains limited, while medium-term growth expectations have continued to decline, the IMF said. In addition, fiscal positions have weakened in most countries, cautioning against further fiscal expansion to boost growth. Flexible exchange rates can play a critical role in facilitating adjustment to more difficult external conditions. In particular, weaker currencies help to redirect demand toward domestically produced output, thereby reducing external deficits.
The IMF calls on policymakers across the region to ensure of sound public finances, especially since downside risks to growth remain prominent. Financial sector vulnerabilities will also need to be monitored carefully given that weaker earnings, tighter funding conditions, and a stronger U.S. dollar are testing borrowers’ resilience.
A key priority for governments will be to tackle long-standing structural problems in an effort to boost investment, productivity, and potential growth. Improvements in business environments, infrastructure, and education will help to foster more diversified, resilient, and prosperous economies, the IMF said.
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