Latin America: From Recovery To Slowdown

• Author(s): José De Gregorio • Published: December 2015
• Pages in paper: 38


Economic performance in Latin America has been disappointing. After a successful recovery from the global financial crisis, growth in 2014 was in most countries, much below expectations and in 2015, growth would still be low. Among the largest seven economies of the region (LAC7), a contraction of output is expected in Argentina, Brazil and Venezuela, while in Chile, Colombia, Mexico and Peru, growth would be about 3 percent. This paper discusses the main factors that explain why growth has been declining. There are cyclical reasons, and, as should have been expected, after rapid recovery, a deceleration should follow. In addition, the evidence would support that potential output growth is below what was experienced at the beginning of this decade, whereas previous assessments were optimistic. The slowdown started before commodity prices started declining, and terms of trade were not significantly low. Therefore it is difficult to blame external factors on the slowdown. However, prospects of lower commodity prices will add to the drag of economic growth. The commodity price boom had a relevant effect on activity, but more than an income effect, it resulted in an investment boom. This has been particularly relevant in Chile and Peru, where that boom has come to an end, adding to the deceleration. Although monetary and fiscal policy may still have a role in supporting demand within inflation target regimes, the main problem in the region is not a lack of demand, but low productivity growth. Efforts must be made to foster productivity. More recently, the cost of institutional weakness and high degrees of inequality have highlighted areas of progress which should be actioned in order to resume high sustainable growth.

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