Latin America and the Caribbean will maintain the recovery that began in the second half of 2009, following the international economic crisis and are poised to grow 4.7% in 2011 with a strong boost from domestic demand, according to the latest report from the Economic Commission for Latin America and the Caribbean.
The “Economic Survey of Latin America and the Caribbean, 2010/2011”, released Wednesday by ECLAC Executive Secretary Alicia Bárcena points out that this rate of growth implies a 3.6% rise GDP per capita.
However Ms Bárcena also cautions about the macroeconomic policy challenges that will be facing the region. How prepared is Latin America and the Caribbean for managing economic growth? We must recover fiscal space in order to be able to take measures to ensure sustained growth with productive employment and equality.
According to Eclac regional growth in 2011 is being driven mainly by private consumption, which can be tracked to improved labour indicators and increased consumer credit. At the same time as idle production capacity is being used up to sustain domestic demand, this is attracting investment which also benefits from greater credit availability.
The report says growth will have a positive impact on the region's labour market, which means unemployment may fall from 7.3% in 2010 to between 6.7% and 7% in 2011.
As in previous years the region presents a three-tier growth pattern. On the one hand, the highest growth rates are in South America, which will expand 5.1% in 2011, on the back of a significant improvement in trade-terms given higher prices for commodity exports. However, Central America will grow 4.3% and the Caribbean 1.9%.
In terms of countries, the fastest growing this year will be Panama (8.5%), together with Argentina (8.3%), Haiti (8.0%) and Peru (7.1%). They are followed by Uruguay with 6.8%, Ecuador (6.4%), Chile (6.3%) and Paraguay (5.7%). At the same time, Brazil and Mexico will grow by 4%, Venezuela by 4.5% and Colombia by 5.3%.
The survey also points out that rising international food and fuel prices, in a context of higher internal demand, have given rise to growing inflationary pressures in the region. As a result, several countries have toughened monetary policy, increasing the difference between internal and international interest rates. In a context characterized by extremely high external liquidity, this may lead to exchange rate appreciation in the region.
For 2012 the growth estimate is 4.1%, which is equivalent to a 3% rise in per capita GDP, although much uncertainty remains because of the global situation.
Eclac highlights the macroeconomic policy challenges facing the region's governments in a context of high commodity prices, considerable international liquidity and the robustness of certain Latin American economies.
In the current scenario, the region's attraction for capital inflows but also the appreciation pressure on local currencies could be of benefit in the short term by helping to relieve poverty and bring down food prices. However, Eclac says this situation involves a series of risks and difficulties.
First, the region becomes vulnerable to speculative capital movements in the quest for short-term gains, and this may create bubbles in the prices of financial assets and property markets.
Second, high international liquidity pushes down real exchange rates while pushing up commodity prices (which encourages intensive specialization in commodity exports and production). This increases the vulnerability of the region's economies to external shocks and creates greater investment volatility, thereby negatively affecting the capacity to grow, generate productive employment and reduce inequality in the mid and long term.
Eclac suggests regional economic authorities should implement measures to contain currency appreciation by combining foreign exchange market interventions, checks on capital inflows and financial regulations. Such measures would be supported by fiscal policy aimed at increasing public sector savings.
Lastly, the report points out the uncertainties in the international economy, particularly in the United States, Europe and Japan, and the possibility of a worsening global climate limiting the region's growth potential.
“It is therefore advisable to take advantage of the current favourable conditions to recover policy space (fiscal, monetary, reserves, etc) that was lost during the crisis.