IMF says economic activity in Latin America and the Caribbean remains ‘sluggish’

Latin America

WASHINGTON, USA (CMC) — The International Monetary Fund (IMF) Monday said that while economic prospects are improving in the Caribbean, they are doing so “with substantial variation across countries”.

“Growth in tourism-dependent economies is expected to strengthen to around two per cent in 2019-20, supported by still strong United States growth, the main market for tourism in the region, and continued reconstruction from the 2017 hurricanes,” said Alejandro Werner, director of the IMF’s Western Hemisphere Department.

Werner, outlining the Regional Economic Outlook Update for Latin America and the Caribbean, said economic activity in Latin America and the Caribbean remains sluggish and that real gross domestic product (GDP) is expected to grow by 0.6 per cent in 2019, the slowest rate since 2016, before rising to 2.3 per cent in 2020.

He said the weak momentum reflects negative surprises in the first half of 2019, elevated domestic policy uncertainty in some large economies, heightened US-China trade tensions, and a somewhat lower global growth.

With regards to the Caribbean, the IMF official told reporters that “economic prospects are generally improving, but with substantial variation across countries”.

He said with improved energy production and higher commodity prices, commodity exporting countries are expected to see some modest recovery in growth, except in Guyana, where the start of oil production in 2020 will provide a substantial boost to growth.

“More generally, regional growth continues to be impeded by lingering structural problems including high public debt, poor access to finance, high unemployment and vulnerability to commodity and climate-related shocks,” he said.

Werner said sluggish activity in Latin America and the Caribbean in the first half of this year largely reflects temporary factors, including adverse weather conditions that reduced mining output in Chile and agricultural output in Paraguay.

He said weaker global growth and lingering US-China trade tensions have also hurt the Latin America region through their impact on commodity prices and exports.

The IMF official said risks to the outlook remain tilted to the downside, including from a further escalation of US-China trade tensions, a slowdown in major economies, and tighter global financial conditions.

“The main domestic risks include a further rise in policy uncertainty, reversal of reforms, and natural disasters. Although portfolio flows were strong early this year, they declined in May-June and could decline further if downside risks were to materialise.

“Given weak growth prospects and significant downside risks, economic policies will need to strike a balance between supporting growth and rebuilding buffers.”

He said regarding policies, fiscal consolidation remains a priority in many countries in the region given high public debt levels.

“This will likely lower growth, but its contractionary effects can be mitigated by protecting public investment and well-targeted social expenditures, while raising revenue and cutting non-priority expenditure.

“In light of lower global growth and an easing bias across major advanced economy central banks, monetary policy can remain supportive of growth in the region, especially given well-anchored inflation expectations, negative output gaps, and generally subdued inflationary pressures in most countries. But efforts should continue to monitor corporate and household leverage to safeguard financial stability.”

Werner said beyond policies to support a cyclical recovery, structural reforms remain an imperative and need to be accelerated to boost potential growth.

“Such reforms should include opening the economies further to trade and foreign direct investment, an easing of regulations in product and labour markets, enhancing competition, and improving the quality of human and physical capital,” he noted.

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