MercoPress. South Atlantic News Agency

Big storm reaching Latam/Caribbean: growth estimate down to 3.2% from 3.7%

Ms Barcena, ECLAC Executive Secretary, countries in the region are in a position to face worsening external conditions

A weak global economy, mainly due to the difficulties faced by Europe, United States and China has affected growth in Latin America and the Caribbean. In 2012 the original growth estimate will fall from 3.7% to 3.2%, according to the latest estimate from the UN Economic Commission for Latinamerica and the Caribbean.

The 2012 Economic Survey of Latinamerica and the Caribbean, released at ECLAC main offices this week in Santiago shows that the slowdown experienced by leading economies last year had a carry on effect into the first half of this year.

Private consumption has been the main driver of regional growth, thanks to the growth in labour markets, increased credit and, in some cases, remittances. However, the dramatic slowdown in external demand and the downward trend in prices of most export commodities have started to have an impact on the region's economies.

“The economic performance of Latin America and the Caribbean in 2012 and 2013 will be largely subject to the adjustment processes in developed countries, as well as the slowdown in China. It will also be dependent on the region's own response capacity”, indicated Alicia Bárcena, Executive Secretary of ECLAC on presenting the document.

According to Ms Bárcena in this challenging scenario the region has accumulated valuable experience in recent years that should enable it to respond appropriately to external turmoil. The report describes measures adopted by governments in the face of international economic difficulties in the period 2008-2012, and concludes that “most countries now have fiscal room to react with anti-cyclical policies to stabilize the patterns of employment, investment and growth”.

The findings of the 2012 survey indicate that the majority of South American and Central American countries (plus Mexico) will have GDP growth rates in 2012 similar or slightly lower than those in 2011, because of the increase in consumption and to a lesser extent, growth in investment. Argentina and Brazil, however, which account for a considerable proportion of the region's weighted GDP, will have slower growth than the rest (2.0% and 1.6%, respectively). This helps to explain most of the estimate reduction for 2012, compared with 2011, when it was 4.3%.

Brazil experienced a stronger slowdown than other countries in the second half of 2011, and it was only in the beginning of the second half of 2012 that some recovery signs emerged. In Argentina, the fall was most striking during the first six months of 2012.

According to ECLAC growth estimates for 2012 will be led by Panama (with GDP growth of 9.5%), followed by Haiti (6.0%) and Peru (5.9%). Bolivia, Chile, Costa Rica, Nicaragua and Venezuela will grow by 5.0% while Mexico will expand by 4.0%. Paraguay will be the only country to shrink (by 2.0%), and this is due to exceptional climatic factors that destroyed part of its soy production, its main export product.

By sub-regions, the Caribbean will grow 1.6%, Central America 4.4% and South America 2.8%.

For next year ECLAC anticipates a slight continuation of the downward trend for most of South American countries as they are heavily dependent on commodity exports to China; growth estimates is similar to 2012 for Mexico and Central American countries. In the Caribbean, the recovery will be gradual, with rates slightly higher than in 2012 in countries that are the most dependent on tourism.

But following the slowdown in 2012, ECLAC predicts a recovery for Argentina and Brazil in 2013, and this would account for most of the average growth increase in the region next year expected at 4.0%.

Inflation retains its downward trend in the second half of the year with an average cumulative variation in the 12 months to June of 5.5%, the lowest figure since November 2010, mainly because of lower food prices.

As to jobs, directly linked to an expansion of domestic demand, in a selected group of countries, urban unemployment fell from 7.2% in the first half of 2011 to 6.8% a year later. For the region average unemployment is expected to be 6.5% for the year, compared with 6.7% en 2011.

Shrinking aggregate demand in developed countries, along with the slowdown in China, has slowed exports to the US, Asia and the European Union in the second quarter of 2012. In the first six months, this also triggered a drop in commodities exported by the region (mainly minerals and food). As a result, the terms of trade worsened in most countries, and 2012 is therefore estimated to close with a regional current-account deficit of 1.9% of GDP.

But the ECLAC report adds that despite turmoil in the international financial sector, the region overall has maintained access to global financial markets and monetary reserves continue to expand. This, combined with a slight improvement in fiscal results of most countries and potential to reduce rates in a context of low inflation, suggests that governments are now in a position to face a possible worsening of the external context.

Finally ECLAC says that investment in the region has been particularly vulnerable to external shocks. To minimize the effects of the situation on the terms of trade and country growth, ECLAC suggests a real and comprehensive stabilization approach that coordinates fiscal, monetary, foreign-exchange and macro-prudential policies. The policy to stabilize the business cycle could then be combined with others that impact external supply and demand, such as industrial, labour and trade policies.

This if accurately implemented could encourage greater output, investment and employment stability while also reducing heterogeneity in production and promoting structural change.