Journal Issue

Regional Surveillance: Western Hemisphere Economic Outlook: Latin America Enjoys Longest Sustained Growth in 30 Years

International Monetary Fund. External Relations Dept.
Published Date:
April 2007
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Latin America is in the middle of its strongest expansion since the 1970s, and the outlook remains favorable for sustained growth. For most countries, the outlook for inflation is favorable too, according to the IMF’s regional economic outlook for the Western Hemisphere.

The good performance has resulted from a combination of generally sound economic policies and a benign international economic situation, including high commodity prices, that have enabled many countries to raise spending and still reduce deficits, the report said.

As a result of the strong growth, unemployment rates and poverty rates fell and, for the first time in decades, there was a moderate reduction in regional income inequality. However, inequality remains quite high compared with much of the rest of the world, according to the outlook, prepared twice a year by the IMF’s Western Hemisphere Department.

Overall, economic growth was 5.5 percent in the Latin American and Caribbean (LAC) region last year and has averaged 5.25 percent for the past three years (see Chart 1). Growth is expected to slow a bit this year, to just under 5 percent, and to about 4.25 percent next year, a reflection of “a deceleration from historically high rates in a number of countries, the slowdown in the U.S. economy, and some declines in commodity prices.” Real GDP growth in the United States is forecast to be 2.25 percent in 2007 compared with 3.3 percent last year. The slower U.S. growth also affects Canada, which is forecast to grow 2.5 percent this year.

Inflation declined in most LAC countries last year, to a regional average of 5 percent, and is expected to rise only slightly in 2007 (see chart 2). But the IMF noted that the “decline was not universal.” In several countries, “inflation accelerated or remained high as economic activity continued to expand beyond potential.”

chart 1Sustained expansion

The Latin American and Caribbean region is experiencing the strongest growth in real GDP it has seen since the 1970s.

(annual percent change)

Source: IMF staff estimates.

Note: The shaded area shows projections.

chart 2Positive inflation outlook

For most LAC countries, the rate of inflation has slowed, and price increases will continue to be moderate.

(percent, end of period)

Source: IMF staff estimates.

Note: The shaded area shows projections.

The strong growth coupled with moderate inflation and expanded social assistance programs in many countries contributed to a continuing improvement in social indicators. Unemployment rates fell, as did poverty rates. The average Latin American poverty rate fell from 44 percent in 2002 to about 40 percent in 2005 and “is estimated to have fallen further to 38 percent in 2006,” the report said, citing data from the United Nations Economic Commission for Latin America and the Caribbean. The largest reductions occurred in Venezuela and Argentina. “Falling poverty reflects both strong income growth and a moderate reduction in income inequality,” the regional outlook said. It said 13 of the 18 countries for which data are available showed an improvement in income distribution, although inequality “remains very high compared with other regions.”

Anoop Singh, Director of the Western Hemisphere Department, told reporters that Latin American economic policies “will need to be vigilant to ensure that the safety margins built up during 2006 do not erode over the next year. With public outlays and imports projected to continue growing at high rates, fiscal and external surpluses are expected to decline.” That points to the “need to rein in the growth of government spending, especially for current outlays, which have been rising particularly rapidly in recent years.”

Singh also emphasized the need to continue to increase equity in Latin America and said living standards can best be raised through continued growth, which, although high by Latin American standards, is no more than “average” when compared with other developing regions.

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