Latin American and Caribbean economic prospects improve, IDB report finds

However, external vulnerabilities a concern. U.S. shocks to region could trim 0.4% from 2% 2017-2019 GDP growth

ASUNCIÓN, Paraguay - The economic outlook for Latin America and the Caribbean is improving, driven by a stronger global economy, improved fiscal positions, lower inflationary pressures, and better prospects for Argentina and Brazil, according to the Inter-American Development Bank’s 2017 Macroeconomic Report.

The first part of the report Routes to Growth in a New Trade World was released on the side of the IDB’s Annual Meeting taking place in Asunción, Paraguay. The second part, on regional integration, will be unveiled Sunday, April 2.

“Since our report last year there have been several positive developments as the region shifts to a pattern of better policies,” said IDB Chief Economist José Juan Ruiz. “Tax reform efforts in some countries have been successful in achieving more equity while improving efficiency. Monetary policies in larger economies have kept inflation in check and we estimate the external adjustment process is close to completion in most countries.”

However, the combination of potential negative U.S. trade and financial shocks, even with the U.S. economy growing, could trim a full 0.4% from the region’s projected 2% annual growth rate for the 2017-2019 period. The report uses the IMF’s three-year projections as a baseline and then estimates how external impacts could add or subtract to the region’s growth.

The shock from the U.S. economy is not evenly distributed. Mexico could see its three-year potential growth rate cut by 0.8%, reducing its annual rate from 2.2% to 1.4%. The Southern Cone and the Andean region would each see their GDP annual growth rate reduced by 0.4%. The shocks would be transmitted through a combination of interest rate hikes, global trade frictions and impacts on commodity prices.

At the same time, the performance of both Argentina and Brazil have a big impact on the region. Given the inter-connectedness of these economies, a $20 billion combined gain or loss in GDP of South America’s biggest economies would add or cut about $70 billion of GDP to the entire region for the three-year period.

Improved fiscal and monetary outlooks

An examination of the fiscal budgets of 22 countries estimates a primary fiscal deficit of 0.8% of GDP for the region, though there the reality varies from one country to another. Still, 15 countries in Latin America and the Caribbean that are pursuing plans for fiscal consolidation are aiming to achieve an adjustment of about 2% of GDP over 5 years. Tax reforms could increase fiscal revenues by 1.2% of GDP. Expenditures are expected to be trimmed by 0.8%.

In the past, external shocks led to higher inflation. This trend has reversed, the report notes, with lower inflation amid more stable commodity prices and rising exports. With imports as a percentage of overall output declining, current account deficits have dropped to medium or long term averages.

“The region is turning the corner after suffering negative growth in the last two years” said Andrew Powell, the report’s coordinator and the senior economic advisor of the IDB. “While Latin America and the Caribbean is on surer footing than it was a year ago, going forward it faces big challenges to bring the kind of growth its citizens demand. This will require a continued focus on reforms to improve productivity and a deepening of regional trade integration.”