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International Agencies – Economic Trouble Ahead

In The Neighbourhood News, Reports and Analysis From Our Latin American and Caribbean Neighbours

Despite the relatively impressive performance of many Latin American and Caribbean economies throughout the global crash of 2007/2008, international agencies concerned with the long-term picture are suggesting that a confluence of largely international factors may militate against sustained growth and stability.

The recently-released Latin American Economic Outlook, 2014 published by the Organisation for Economic Co-operation and Development (OECD), Economic Commission for Latin America and the Caribbean (ECLAC) and the Latin American Development Bank (CAF), for example, concludes that “the external scenario is less favourable for the region” post-2007/2008.

Among the main factors responsible for this less than optimistic outlook is a noted downturn in global trade, “moderation in commodity prices” and what these agencies describe as “the increased uncertainty surrounding global financing conditions.”

There is concern as well that the weak performance of the Euro together with a slowdown in Chinese growth statistics and the “normalisation of US monetary policy” will have an impact on international capital markets which countries of Latin America and the Caribbean will not escape.

More moderate growth in global trade is likely to feature lower demand for regional exports even as prices for commodity exports continue to decline or remain suppressed. Hemispherically, this has been manifest via deterioration in trade balances with huge gaps between current-account balances involving the non-energy producers and those countries, such as Trinidad and Tobago, that are net oil and gas exporters.

There is also a view expressed in the 2014 forecast that if the United States tightens its monetary policy, “external financing will steadily become more expensive and capital outflows to the region will probably fall, resulting in greater uncertainty and more volatile capital markets.”

It is likely, the report suggests, that increases in domestic demand could “partly compensate for the slowdown in external demand” but it is noted that many economies of the region “are converging towards their potential GDP following an expansionary phase of the business cycle.”

The unfolding impact of these developments is noted in a separate report published by ECLAC and the International Labour Organisation (ILO) – “The Employment Situation in Latin America and the Caribbean” – which is predicting that hemisphere-wide, urban unemployment is unlikely to move considerably from rates of between 6.2% and 6.3%.

In the first six months of the year, the regional economy only grew by 2.5%.

“The slowdown in the region’s economic growth in the first half of 2013 resulted in lower demand for labour,” the report says. “More specifically, this took the form of lower generation of wage employment.”

The joint OECD/ECLAC/CAF report meanwhile concludes that though many economies of the region “have some monetary and fiscal space for an additional stimulus to compensate for temporary external shocks, the region is faced with a more permanent, widespread economic slowdown that makes it difficult to provide this kind of stimulus.”

Several countries, it was observed, are “converging towards their potential GDP from an expansionary phase of the business cycle, and some are also faced with supply-side bottlenecks, making them vulnerable to domestic and external imbalances if there is an additional stimulus.”

“Previous episodes of economic instability in the region are a reminder to be vigilant of expanding domestic credit and changes in fiscal aggregates,” the report says.

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