Latin America growing smartly. Source: Google Images
The Economic Commission for Latin America Monday said it expects GDP growth to slow in the region to 4.2% from 6% this year. This forecast makes sense. A slowdown will be driven by tighter macro policies across the region that seek to stem inflationary pressures, as well as slower growth in the advanced economies and China, limiting demand for the region’s exports; the latter should also cause commodity price weakness, as China’s insatiable appetite for metals, energy, food and the like softens a little.
A modest slowdown in Latin America and the Caribbean will be a good thing overall, reducing risks of inflation and an asset price bubble, thereby ensuring the region’s secular economic rise will continue in a sustainable manner in the years to come. In general, Latin countries oriented toward Asia, specifically toward China and India, will grow more rapidly than those oriented toward the US and Europe. Thus, Mexico will continue to be in the doldrums, while Chile and Peru should post strong growth rates.
Capital inflows accelerated to most countries in the region this year, given weak investment opportunities in advanced economies and America’s aggressive monetary easing. This has buoyed demand in Latin America, as well as raised the risks of inflation and an asset price bubble. As a result, cautious Latin governments have implemented measures to slow or mute the effect of inflows, including raising bank reserve requirements. These measures should continue to bite in 2011. Nevertheless, it will prove difficult to manage policy priorities, as the concern over losing competitiveness due to appreciating currencies is causing Latin governments to accumulate fx reserves, which runs counter to the inflation fight.
China too has been worried about economic overheating, so its government, which directs the economy more forcefully than do Latin governments, is implementing a host of measures to bring GDP growth down to earth. So, Chinese growth should slow from near 10% this year to around 8.5% next year, moderating demand for Latin exports, especially affecting commodity exporters such as Venezuela, Argentina, Brazil, Chile and Peru. While certainly not making up for China’s slowdown, India’s economy should grow a buoyant 8.5% next year, contributing to demand for Latin goods. The euro area will remain in the doldrums, due to the sovereign credit crisis there and the consequent fiscal tightening occuring in many countries. US growth will slow modestly as the Obama fiscal stimulus peters out.
Latin America’s largest economy, Brazil’s, should slow markedly to growth below 5% in 2011, from an unprecedented 7% likely in 2010. Slowing demand from China and Europe and a strong currency, coupled with domestic measures to slow capital inflows, should cause growth to fall. The Mexican saying, So close to the United States, so far from God, may apply again in 2011, as growth, at under 4%, will remain paltry compared to other emerging markets. Peru’s gangbusters economy should continue to grow smartly, above 6%, slowing from above 7% this year; a similar story will obtain in Chile. Venezuela’s distorted economy will go the way of oil prices, as always, with growth flat to slightly negative, following two years of economic decline. Colombia will be buffeted by sluggish demand from Venezuela and the United States. And, Argentina will see a slowdown, to 4-5%, amid weaker commodity prices, its continuing slog to emerge from financial pariah status, and some heightened political uncertainty.
