Preliminary Overview of the Economies of Latin America and the Caribbean 2011
Economic Development Division
ECLAC projects growth of 4.3% for the Latin American and Caribbean economy in 2011, lower than the rate in 2010 when the region was rebounding from the impacts of the economic and financial crisis of 2008-2009. The forecast growth rate for 2011, which represents a 3.2% rise in per capita GDP, reflects two main factors: the slacking of global economic growth and the cooling of domestic demand in Brazil, the region’s largest economy, prompted by the government’s measures to keep the economy from overheating after its growth surge in 2010.
During the first part of the year, however, external conditions remained benign for the region, with strong demand for its exports, improvements in the terms of trade and advantageous access to external financing. Several countries posted a more robust performance than in 2010, including oil exporters which gained from high international prices and several Central American and Caribbean countries which benefited from increased exports to the United States and remittances from emigrant workers. GDP growth was 4.6% in South America slightly above the 4.1% rate for Central America, while expansion of only 0.7% for the Caribbean is due to a contraction in Trinidad and Tobago, the subregion’s largest economy.
In the first half of the year, macroeconomic policy faced a number of challenges stemming partly from developments in international markets. The countries tackled these in different ways, depending on their structural characteristics, the severity of the respective impacts, the instruments available to them and their policy priorities. First of all, the positive outlook for the region’s economy and the interest rate spreads with respect to global financial markets —widened, in some cases, by the monetary policies deployed to contain the inflationary impact of rising international prices, especially for foods and fuels— spurred capital inflows which contributed to real currency appreciation in the region. In this context, a number of countries also withdrew the fiscal stimulus, seeking at the same time to regain the fiscal space consumed by the measures implemented to soften the impacts of the 2008-2009 crisis. Even so, the central government overall balance rose by 0.4 percentage points on average, mainly owing to higher fiscal revenues. As the year advanced, however, and the global and regional economic slowdown began to take hold, the focus of economic policy turned increasingly to maintaining an acceptable rate of growth, especially as the euro zone situation and outlook deteriorated.
At the regional level, growth in all demand components was down for the year overall, after the brisk recovery in 2010 from the lows during the global financial crisis. Household consumption continued to grow at rates above output, however, thanks to rising real wages and to strong job creation which brought the regional unemployment rate down from 7.3% in 2010 to 6.8% in 2011. Credit also continued to expand rapidly. Readily available credit at rates of interests which in many countries actually fell in real terms also contributed to a fresh rise in gross fixed capital formation, which took the investment ratio to a new record for recent decades, although it is still not high enough to sustain the growth rates required to satisfy the many economic and social needs of the region. Imports surged in response to buoyant domestic demand, while exports climbed mainly because of higher prices, while volumes increased less. In this context, the deficit on the balance-of-payments current account widened slightly to 1.4% of GDP, and was more than offset by voluminous inflows of foreign direct investment and, to a lesser extent, portfolio investment, which enabled fresh rises in international monetary reserves.
Driven mainly by high international prices for foods and fuels, the inflation rate rose in the first part of 2011, but began to ease later and ended the year at a rate of around 7%, only slightly higher than end-2010.
The slowdown in regional growth steepened in the second half of the year, reflecting slackening export growth, falling prices for the region’s main export commodities —which nonetheless remained at historically high levels— and cooling domestic demand. Particularly in the fourth quarter, regional growth expectations took a more negative turn as uncertainty mounted over the future of the global economy, especially in view of doubts over whether a sustainable solution will be found to the debt crisis in several euro zone countries, and the resulting volatility in international markets.
This is the scenario underlying 2012 economic growth projections for Latin America and the Caribbean. With global economic growth remaining sluggish, the regional slowdown is likely to continue, with a fresh, albeit moderate fall in the growth rate to 3.7%. A bleaker scenario cannot be ruled out, however, if the euro zone crisis deepens. This would take a toll on global markets and would certainly hurt the region’s growth prospects by impacting on both the real economy and the financial markets. Amid such great uncertainty and facing the possibility of sharp changes in the external environment, the Latin American and Caribbean countries should prepare the best possible measures in light of their national situations to protect and strengthen the bases of their economic and social development. Standing them in good stead are voluminous international monetary reserves and —with the exception of some Caribbean countries— low levels of public and external debt. On the other hand, less leeway is now available for some of the countercyclical instruments deployed during the 2008-2009 crisis and some of the external factors which contributed to the rapid recovery of the global economy at that time, especially the developed countries’ fiscal and monetary coordination, are now weaker.