International Monetary Fund Economic Counsellor and Director of the Research Department Olivier Blanchard speaks on a panel to discuss World Economic Outlook IMF Headquarters in Washington. Flickr IMF Staff Photograph/Stephen Jaffe
IMF significantly lowers growth forecast; World Bank predicts 2015 to be worst year since financial crisis; Overall Latin American economy shrinks for fifth consecutive year; Economic problems caused by lower commodity prices; Several countries still expected to preform well
Last Thursday, the International Monetary Fund (IMF), in an update to its World Economic Outlook report, drastically lowered its 2015 growth forecast for Latin America and the Caribbean. The IMF lowered the region’s growth forecast to 0.5 percent, down from April’s predictions of 0.9 percent. The 188-nation strong organisation also lowered its 2016 forecasts for the region, though the estimated drop from 2 to 1.7 percent is much less severe. Similarly, the World Bank has also predicted this year to be Latin America’s worst for growth since the 2007-8 financial crisis.
The July update to this year’s report adjusts predictions for Mexico and Brazil. Latin America’s largest economy, Brazil, is now expected to contract by 1.5 percent, much worse than its April forecast of a shrinkage by 1 percent. For next year Brazil is currently expected to rebound with 0.7 percent growth; however this is also down from an earlier forecast of 1 percent. Aside from regional issues, the Washington-based IMF highlighted an austerity program, implemented by President Dilma Rouseff aimed at restructuring government accounts as the chief reason behind the drop in the short term.
Mexico, though still predicted a reasonable growth of 2.4 percent, has seen forecasts lowered from a much more favourable 3 percent. Mexico is expected to grow around 3 percent in 2016, but like Brazil this is also adjusted down from 3.3 percent. The IMF specifies a first-quarter contraction in the United States, Mexico’s primary trading partner, as the cause.
Latin America as a region sustained impressive growth rates for almost a decade from 2003 to 2012, during a global boom in commodity prices which was largely driven by China’s growth. Regionally, many countries developed export-based economies and, according to the World Bank, experienced yearly growth in excess of five percent – greater than most emerging economies and G7 countries. This impressive growth managed to lift 70 million people out of poverty and grow the continent’s middle class by 50 percent.
Regional growth has now dropped to a much lower annual average of around 2 percent and the 2015 forecast signals a fifth consecutive year in which Latin America has declined. Eugenio Aleman, senior economist at Wells Fargo Securities, summarises the regional outlook: ‘Brazil is in bad shape. Argentina isn’t much better. Chile has slowed down to a trickle… Peru is slowing down considerably.’ Furthermore, Venezuela is experiencing high inflation while Colombia and Peru have the world’s two worst stock markets this year.
Senior Brown Brothers economist, Win Thin, believes the weakness in Latin America reflects ‘the weaker global outlook’. The IMF has lowered its global predictions by 0.2 percent to 3.3 percent growth in 2015. Olivier Blanchard, the IMF’s chief economist, says this trend is common in ‘emerging markets and low-income developing economies’.
In addition to reduced international growth, the changing role of China has had a heavy regional economic impact. China, the largest trade partner for many Latin nations, whose heavy commodity consumption fuelled many countries to develop export-based economies over the last decade, has seen smaller growth in recent years. This steady decline has adversely affected commodity prices and as China’s growth decreases, so does its demand for commodity imports. Worryingly for Latin America, China is now attempting to change its economic model to become more self-sufficient and rely less on commodity imports.
Another explanation for the recent drop is the increased strength of the US dollar. This growth has driven up the price of imports for Latin American nations as well as making debt repayments more costly. This year the dollar grew by 34 percent and 41 percent respectively against the Colombian and Brazilian currencies.
Despite a generally poorer economic outlook in comparison to recent years, several countries in the region look set to evade many of the economic woes that have affected some of the more important regional economies like Argentina, Brazil and Venezuela. The Caribbean, Central America and Mexico, for instance, generally have favourable growth forecasts thanks to the drop in oil prices and a gradual economic recovery in the US. Some countries like Bolivia, the Dominican Republic, Nicaragua, Panama, Paraguay and Peru are expected to reach strong growth of around 4 to 6 percent this year. Meanwhile Chile, Costa Rica, Mexico and Uruguay are expected to grow around 3 to 4 percent.
