The economies of Latin America and the Caribbean are seen experiencing a moderate recovery in 2018 and growing 2.2% next year, after notching 1.3% growth on average in 2017, ECLAC indicated today upon releasing its report Preliminary Overview of the Economies of Latin America and the Caribbean 2017.
These projections for economic activity in the region come about in a more favorable international context than in the last few years. According to the report, in 2018 it is expected that the global economy will expand at a rate close to that of 2017 (around 3%) and that emerging economies will show greater dynamism than developed ones. In the monetary sphere, the current situation of ample liquidity and low international interest rates is seen holding steady.
In addition, domestic demand will play an important role in the acceleration of growth in 2018, although with variations among its components. Private consumption continues to be the motor of domestic demand but in 2018 investment will make a greater contribution, thanks to a recovery in gross fixed capital formation, ECLAC indicated today.
The Executive Secretary of the Economic Commission for Latin America and the Caribbean (ECLAC), Alicia Bárcena, gave a press conference at the organization’s headquarters in Santiago, Chile to unveil the document, in which the regional United Nations body analyzes the economies’ performance and updates its latest growth projections for countries (which were released last October). It also provides recommendations to foster development with greater inclusion, equality and environmental sustainability in the region.
“Although there is reduced fiscal space in the region, we need to promote active public policies to sustain the expansion cycle. These include strengthening regulation, productive development, tax collection and intraregional trade,” ECLAC’s most senior authority stated. “Spending that has a greater impact on growth and inequality must be prioritized, along with avoiding sharp adjustments in public investment to protect growth in the medium term.”
Despite the more favorable international context, ECLAC noted that some challenges and latent risks persist that could affect the consolidation of growth in the medium term. In the financial arena, there is uncertainty regarding normalization of the monetary conditions that have been implemented or announced by the US Federal Reserve, the European Central Bank and the Bank of Japan. This is compounded by the trend toward greater financial deregulation (laws to reform Wall Street and consumer protection in the United States).
A possible tax reform in the United States could bring with it greater financial volatility due to an increase in capital flows to that country. There are also geopolitical risks, especially those stemming from the increased protectionism seen in some countries and reflected in growing support for anti-globalization parties in some European nations, as well as last year’s vote in favor of the Brexit in the United Kingdom.
The 2018 regional growth figure can be partly explained by greater dynamism in Brazil’s economic growth (2%, compared with 0.9% in 2017). In addition, several countries that were growing at moderate rates will see their economic activity accelerate (for example, Chile will rise from a rate of 1.5% in 2017 to 2.8%; Colombia, from 1.8% to 2.6%; and Peru, from 2.5% to 3.5%). In Latin America, Panama will be the economy that marks the highest growth rate next year (5.5%), followed by the Dominican Republic (5.1%) and Nicaragua (5.0%). Cuba, Ecuador and Venezuela will post figures of 1%, 1.3% and -5.5%, respectively, while the rest of Latin America’s economies will expand between 2% and 4%.
In the analysis by subregion, ECLAC foresees greater dynamism next year in South American economies, which are expect to grow 2% (compared with the 0.8% recorded in 2017). Central America, meanwhile, should have a growth rate of 3.6%, above the 3.3% seen in 2017. The English- and Dutch-speaking Caribbean is forecast to grow 1.5% on average in 2018 (compared with virtually no growth in 2017), boosted in part by reconstruction spending after the Irma and Maria hurricanes caused damages to some of the island countries.
In labor matters, it is expected that the unemployment rate will start to decline as of 2018, in keeping with the improvement in economic growth. Between 2016 and 2017, urban unemployment rose from 8.9% to 9.4% due to an increase in the labor participation rate and stagnation in the employment rate. In 2018, unemployment is seen declining to 9.2% due to a rise in employment related to greater aggregate demand, the report indicates.
In its Preliminary Overview 2017, ECLAC recommends that countries expand their fiscal space in accordance with each of their realities and based on differentiated tasks. For example, in countries with low tax collection, tax activism can be maintained, while in all nations officials should try to reduce fiscal avoidance and evasion – which totaled $340 billion dollars in 2015 – by strengthening tax administration.
The organization also indicates that countries must broaden international cooperation mechanisms, evaluate spaces for the use of public credit (depending on the debt/GDP ratio of each country), strengthen the provision of public goods with high economic and social yields (such as infrastructure, social protection, health and education), and increase the investment coefficient through public-private partnerships and the redesign of tax incentives for industrial policies. They must also improve the mechanisms for administering public spending and accountability, and safeguard public investment, among other measures.