The Economic Outlook for Latin America 2007

Rafael Pampillón. Professor. IE Business School

3 July 2007

The Latin American economy continues to grow at a rapid pace although predictions for 2007 show some slowing in growth. The question lies in whether this growth will continue in the future or whether social and political instability as well as a cooling of the US economy is going to have greater effect than expected.

According to the World Bank, Latin America grew 5% in 2006. The growth rate is expected to slow this year to 4.2%, although growth for the region will remain above 4% for the fourth year running. Per capita income will expand at an accumulated rate of 15% for the 2003-2007 period, equivalent to an average growth rate of 2.8% per annum. Strong world economic growth and increasing international demand for raw materials contributed to Latin America’s healthy economic performance.

Employment growth is expected to increase in 2007, boosted by the region’s strong economy. In 2006, unemployment continued the downward trend begun in 2004, though it slid at a faster pace, pushing down the jobless rate for the year to 8.7%, compared to 9.1% the year before, according to CEPAL. In contrast to earlier years, real salaries rose in 2006 on the back of increased demand for employment, while average salaries in the region’s formal sector climbed around 3% in real terms.

TGDP growth rates by sub-regions

  2004
2005
2006 2007
América Latina 5,9 4,5 5,0 4,2
América del Sur 6,9 6,9 5,3 5,1
  - Brasil 4,9 2,3 3,5 3,5
  - Cono Sur 8,4 8,3 6,5 5,5
  - Países Andinos 9,5 6,9 6,9 6,0
México y Centroamérica 4,2 3,2 4,6 3,6
  - México 4,2 3,0 3,0 3,5

Source: based on data from the World Bank and CEPAL

Why is growth slowing in 2007? The main reason is a general slowdown in the world economy and, more specifically, in the US. This US deceleration will not affect all parts of the Americas equally. It will be more strongly felt in Mexico and Central America, where the economies are more closely linked to the USA. The region’s overall growth rate masks the large differences between one country and another. More specifically, the current situation has most benefited countries, particularly in Latin America, that export natural resources that are in high demand. (see http://economy.blogs.ie.edu/).

The solid economic growth experienced by the US and the growing demand in Asian countries such as China and India boosted Latin American exports. However, only six out of 19 Latin American countries enjoyed a current account surplus in 2006, and four of these—Argentina, Brazil, Chile and Venezuela—enjoyed the lion’s share of the region’s surplus.

If, in 2007, raw material prices were to return to the levels of the 1990s, the region would swing into a current account deficit equivalent to 2.7% of Gross Domestic Product. Contributing to this situation would be lower prices of raw materials such as soya, copper and oil; a slowdown in the US economy; greater competition from Asian textile and clothes producers; and the appreciation of many Latin American currencies.

If the prices of raw materials were to fall, countries that are highly specialised in exporting these materials, such as Chile and Venezuela, would end up with significant deficits. Paradoxically, if the price of raw materials were to decrease, the current account balance of a majority of Latin American countries would improve, mainly because they import rather than export raw materials.

In short, Latin America´s growth rate is expected to decelerate a little in 2007, damped by lower world economic growth and an expected fall in raw material prices. Some of the region´s countries, such as Colombia, Ecuador, Mexico, Trinidad and Tobago and Venezuela, will continue to benefit from relatively high oil prices, even though these are lower than in 2006. Investors, worried about rising political populism, will think twice in 2007 before investing capital in Latin America, thus contributing to the current downward trend in direct foreign investment in the region. For the Latin American economy to continue to grow, greater credibility and political and economic stability are needed.

In this context, the nationalisations of the Venezuelan telecommunications and electricity companies that were announced at the beginning of 2007-- coupled with the move to strip the country’s central bank of its remaining vestige of independence-- do not bode well for the future of Latin America.

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