Growth in Latin America and the Caribbean Slows Further

IMF trims growth forecast for Latin American and Caribbean to 1.3% in 2014 and 2.2% in 2015

Lower commodity prices, domestic policy uncertainties main drag on growth

Structural reforms critically needed to increase productivity and potential growth

GDP growth in Latin America and the Caribbean is projected to expand by 1.3 percent in 2014, the second-lowest growth rate in 12 years and more than one percentage point below the rate projected in April 2014, the IMF said in its latest Regional Economic Outlook Update for the Western Hemisphere, released October 10 in Washington, D.C. The largest downward revisions are those for Argentina, Brazil, Chile, Peru, and Venezuela.

According to the report, a combination of external and domestic factors explain these sizable downward revisions. On the external side, the weakening of key commodity prices has created a general sense of leaner times and caused the private sector to curb its spending. Domestic policy uncertainties have further depressed confidence in several countries.

For 2015, growth is expected to recover to 2.2 percent, as some short-term brakes on activity ease and domestic policy uncertainties are likely to diminish in a few countries, the IMF said.

Significant risks to the outlook

“A sharper slowdown in China remains a key risk for commodity exporters in Latin America and the Caribbean,” said Alejandro Werner, Director of the IMF’s Western Hemisphere Department at a press briefing today. The outlook for Latin America could also be undermined by renewed financial volatility, including a faster-than-expected rise in U.S. interest rates.

“On the upside, Mexico, Central America, and parts of the Caribbean would benefit from a stronger U.S. recovery,” Werner added.

Policy priorities

Despite the marked slowdown in the region, economic slack is still limited in many countries, the IMF said. Unemployment hovers at record-low levels and well below typical estimates of the natural rate. Inflation exceeds the official midpoint targets in most of the larger economies. And persistent external current account deficits provide another indication of limited economic slack.

This constellation—of a persistent slowdown amid still-tight supply conditions—calls for a clear focus on structural reforms to increase productivity and potential...