WASHINGTON – Growth in Latin America and the Caribbean is picking up, thanks to stronger demand at home, and a favourable global environment helped also by rebounding commodity prices.
But to secure more durable growth with widespread benefits, the region needs to invest more in key sectors, like infrastructure and education, to boost productivity over the longer-term, the IMF said in its latest regional assessment.
The Regional Economic Outlook for the Western Hemisphere estimates growth for the region to increase from 1.3 per cent in 2017 to 2 per cent in 2018. For 2019, the report forecasts growth to continue to pick up to 2.8 per cent.
Following the recovery in private consumption in 2017, business investment is expected to rise and become the main driver of economic activity, after a three-year contraction.
Despite this rebound, investment levels are expected to remain below the levels as seen in other regions, limiting the region’s growth potential, according to the report.
But many challenges lie ahead for the region. According to the report, noneconomic factors that could derail the region’s recent economic recovery include political uncertainty due to upcoming elections in several countries, geopolitical tensions, and extreme weather events.
Heightened economic risks externally—notably, a shift towards more protectionist policies and a sudden tightening of global financial conditions—could also weigh heavily on growth prospects.
Looking ahead, longer-term growth prospects for Latin America and the Caribbean remain subdued, suggesting that income levels in these countries are struggling to catch up to advanced economies.
Despite recent gains in poverty and inequality reduction, Latin American and the Caribbean remains the most unequal region in the world. In response to these challenges and to secure durable growth that benefits all, policymakers in the region will need to implement key reforms and policies that focus on: continuing to adjust to place debt ratios on a sustainable footing with a special attention to the quality of the adjustment; further improving central bank communication and transparency to better deal with future shocks; investing more in people through more efficient spending in education; improving infrastructure, which would also boost other investment in the region; tackling corruption by improving governance and the business climate; opening up more to trade and financial markets, which can be seen as a step toward greater global integration; and protecting gains from social spending.
Growth in South America is being led by the end of recessions in Argentina, Brazil, and Ecuador, higher commodity prices, and a moderation of inflation that has provided space for monetary easing.
In the near term, Mexico, Central America, and parts of the Caribbean are benefiting from stronger growth in the United States. Nevertheless, potential implications of the US tax reform and ongoing renegotiations of the North American Free Trade Agreement (NAFTA) are also creating uncertainties for the region.
Specifically for the Caribbean, prospects are improving, with growth in both tourism-dependent economies and commodity exporters projected to be in the one to two per cent range for 2018 and 2019.