IMF downgrades growth projections for Latin America and the Caribbean

Latin America

Economic growth projections for Latin America and the Caribbean have been downgraded in the latest World Economic Outlook (WEO) report from the IMF.

“In Latin America, activity slowed notably at the start of the year across several economies, mostly reflecting idiosyncratic developments,” the report stated. “The region is now expected to grow at 0.6 per cent this year (0.8 percentage points lower than in the April WEO), recovering to 2.3 per cent in 2020.”

The projection for Latin America and the Caribbean is part of a wider downgrade of global growth “to 3.2 per cent in 2019 and 3.5 per cent in 2020”. Compared to the slash in projections for Latin America and the Caribbean, the global projection is only lowered by 0.1 per cent from the April projection.

An improvement in global growth is expected between 2019 and 2020, but 70 per cent of this improvement is reliant on improved performances of “stressed emerging market and developing economies”, which brings uncertainty to any projections.

According to Gita Gopinath, economic counsellor and director of the Research Department at the IMF, the current global situation is also “self-inflicted” through insecurity due to policy uncertainty, sparked by trade tension and conflict.

“Dynamism in the global economy is being weighed down by prolonged policy uncertainty as trade tensions remain heightened despite the recent US-China trade truce. Technology tensions have erupted, threatening global technology supply chains, and the prospects of a no-deal Brexit have increased,” Gopinath explained.

The WEO, in presenting its projections for Latin America and the Caribbean focused on Brazil, Mexico, Argentina, Chile and Venezuela.

Brazil’s downgrade is mainly due to continuing uncertainty over the approval of “pension and other structural reforms”. The country’s growth projection has been reduced from 3.1 per cent in the April report to 0.8 per cent.

Policy uncertainty, declining confidence, increased borrowing costs, and a downgrade of its sovereign rating is affecting Mexico’s economy. Mexico’s growth is down to 0.9 per cent compared to 1.6 per cent in April.

Both Argentina’s and Chile’s growth forecasts have been revised down slightly while Venezuela, whose economy is expected to contract by 35 per cent this year, is suffering the effects of its devastating economic and humanitarian crisis.

In terms of the projected but precarious global recovery between now and next year, Gopinath cautions that an escalation in trade tensions could put it in jeopardy by disrupting “global supply chains”.

“The combined effect of tariffs imposed last year and potential tariffs envisaged in May between the United States and China could reduce the level of global GDP in 2020 by 0.5 per cent,” she indicated. “Further, a surprise and durable worsening of financial sentiment can expose financial vulnerabilities built up over years of low interest rates, while disinflationary pressures can lead to difficulties in debt servicing for borrowers. Other significant risks include a surprise slowdown in China, the lack of a recovery in the euro area, a no-deal Brexit, and escalation of geopolitical tensions.”

Gopinath suggests that tariffs should not be utilised to “target bilateral trade balances or as a general-purpose tool to tackle international disagreements”. She is advocating an improved “rules-based, multilateral trading system” to resolve conflicts, and stresses that “countries need to work together to address major issues such as climate change, international taxation, corruption, cyber security, and the opportunities and challenges of newly emerging digital payment technologies”.

Accomodative monetary policy, reinforced with secure trade policies, is necessary where inflation is falling below targets, and “fiscal policy should balance growth, equity, and sustainability concerns, including protecting society’s most vulnerable” according to Gopinath.

— Alexis Monteith

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