Preliminary Overview of the Economies of Latin America and the Caribbean 2008

With annual economic growth for Latin America and the Caribbean being projected at 4,6%, 2008 will mark both the sixth consecutive year of growth and the end of a period which has very few precedents in the economic history of the region. Between 2003 and 2008, regional GDP growth averaged nearly 5% per year, with per capita GDP increasing by over 3% per annum. This growth was coupled with improvements in labour-market indicators and a reduction in poverty in the region. One of the most outstanding features of this period has been the fact that, in most of the countries, policymakers have placed priority on maintaining macroeconomic balances, which has helped generate surpluses in both their external and their fiscal accounts. The highly favourable external economic environment of the last few years has been another contributing factor.

These results will not be repeated in 2009, however. Growth projections for next year are much lower than for the period that is now coming to a close. In view of this situation, the governments of the region should make every effort to deploy countercyclical policies in order to ward off an even sharper economic decline. The growth rate for Latin America and the Caribbean is projected to be 1.9% in 2009 based on a relatively optimistic scenario with regard to the path that the present crisis will take in the future.

Again in contrast to the period 2003-2008, growth projections for the region suggest that the regional unemployment rate will rise from an estimated 7.5% in 2008 to between 7.8%and 8.1% in 2009, depending on the changes that occur in the labour force participation rate, while the informal sector of the economy also expands. The behaviour of international food and fuel prices, on the other hand, indicate that inflation will subside from 8.5% in 2008 to around 6% in 2009.

In just slightly more than a year's time, what had started out as a problem in the subprime mortgage market in mid-2007 turned into a systemic crisis that crippled the credit markets of the developed countries. This will undoubtedly have an extremely negative impact on the real economy, although, as of the end of 2008, it is still too soon to accurately gauge the full impact of the crisis.

The depth and duration of the recession will depend on the effectiveness of steps taken to stimulate demand and offset the slump in private spending, as well as on the normalization of credit markets. It is to be hoped that the array of measures implemented by the United States Federal Reserve and other central banks will succeed in containing systemic risk and that, in conjunction with the recovery of their financial systems as well as fiscal policy measures, the developed economies will begin to emerge from the depths of the crisis in the second half of 2009. This is the fairly optimistic scenario on which the growth projections for the region for 2009 are based.

Although the region is better prepared than before to handle a crisis, there are a number of channels through which its effects are likely to be transmitted to the economies of Latin America and the Caribbean. First, the global slowdown will drive down export volumes and prices, remittances, foreign direct investment and the demand for tourism services. In addition, external financing will be more expensive and will be more difficult to obtain for the countries of the region.

Growth in 2009 is projected to be 1.9%. This estimate is built on a scenario in which the global economy, in general, and the regional economy, in particular, will gradually begin to make a recovery during the second half of the year. This projection is based on a comparison of average levels for 2008 and 2009 which points to a sharp slowdown, with the growth rate largely reflecting a statistical effect. A more pessimistic scenario of continuing and even deepening recession and tight credit conditions cannot be ruled out, however. In this case, obviously, the problems discussed here would worsen and the growth rate could be lower than the current projection.

The deterioration of labour-market indicators and the decline in remittances will have a negative impact on income distribution in the region. Under current circumstances, this means that public policymakers will face the double challenge of implementing countercyclical measures to stabilize economic growth and of developing instruments to shield the most vulnerable sectors of the population from the effects of the crisis. The fiscal resources available to each country for use in financing these types of policy actions differ considerably, although public finances in general will come under greater pressure, given the expected decrease in fiscal revenues.