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Latin American and Caribbean Growth Will Fall to 3.2% in 2012 Owing to the Weak Global Economy
Source: UNECLAC Website: http://www.cepal.org/cgi-bin/getProd.asp?xml=/prensa/noticias/comunicados/5/48065/P48065.xml&xsl=/prensa/tpl-i/p6f.xsl&base=/tpl-i/top-bottom.xsl
Source Date: Monday, February 04, 2013
Focus: Electronic and Mobile Government, ICT for MDGs
Created: Feb 04, 2013

The 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 region's growth will be slower than in previous years, according to estimates presented today by ECLAC.

In the Economic Survey of Latin America and the Caribbean 2012, launched in Santiago, Chile, the United Nations agency states that slowdown experienced by economies in 2011 carried over into the first half of 2012, and this has brought down the growth projection for the entire year from the 3.7% announced in June to 3.2%.

According to the document, 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 the prices of most export commodities have made foreign trade the main way in which international crises have been passed on to the region's economies.

"The economic performance of Latin America and the Caribbean in 2012 and 2013 is largely subject to the form taken by 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, as she presented the document.

In this sphere, 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 the fiscal room for manoeuvre to react with anti-cyclical policies to stabilize the patterns of employment, investment and growth (see attached fact sheet).

The findings of the Economic Survey 2012 indicate that the majority of South American and Central American countries (plus Mexico) will have GDP growth rates in 2012 that are similar or slightly lower than those in 2011, because of the increase in consumption and, to a lesser extent, the 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 explains most of the reduction in the region's growth in 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 signs of recovery began to appear. In Argentina, the fall was most striking during the first six months of 2012.

According to ECLAC estimates for 2012, growth 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% this year, 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 production of soya - its main export product.

In terms of subregions, the Caribbean will grow by 1.6%, Central America by 4.4% and South America by 2.8%.

The scenario predicted for 2013 includes a continuation of the slight downward growth trend for most South American countries, as they are more dependent on commodity exports to China, with growth similar to 2012 levels for Mexico and Central American countries. In the Caribbean, the recovery will be gradual, with growth rates slightly higher than in 2012 in countries that are the most dependent on tourism.

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 for that year (expected to stand at 4.0%).

As for inflation, the report states that it has maintained its downward trend in the second half of 2012, with an average cumulative variation in the 12 months to June of 5.5%, which is the lowest figure since November 2010 thanks to smaller increases in food prices.

As far as employment is concerned, the document explains that the increase in work and its quality, plus higher wages, have all contributed to a moderate expansion of internal demand and consumption in the region. In a selected group of countries, the urban regional unemployment rate fell from 7.2% in the first half of 2011 to 6.8% one year later. For the region as a whole, average unemployment is expected to be 6.5% for the year as a whole, compared with 6.7% en 2011.

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

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

In the report, ECLAC states 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 macroprudential policy.  This 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 would encourage greater stability of output, investment and employment, while also reducing heterogeneity in production and promoting structural change for equality.

See also:

•           Fact sheet: The Countries of the Region Have Enough Fiscal Space for Facing External Adversity

•           Table. Latin America and the Caribbean: Total GDP, 2010-2013

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