Subdued Growth in Latin America for 2014

Latin America expected to grow by 2½ percent in 2014 and 3 percent in 2015

Risks to growth include lower commodity prices, rising external funding costs

Region should strengthen public finances, step up structural reforms

The recovery in the United States and other advanced economies is expected to bolster export growth, but lower world commodity prices and rising global funding costs are likely to weigh on activity across the region.

The IMF’s Regional Economic Outlook for the Western Hemisphere, released on April 24 in Lima, Peru, projects regional growth of 2½ percent in 2014, down from 2¾ percent in 2013. Weak investment and subdued demand for the region’s exports held back activity in 2013, as did increasingly binding supply bottlenecks in a number of economies. For 2015, the IMF projects a modest pickup, to 3 percent.

According to the report, Latin America still faces a number of downside risks. The key risk is a sharper decline in commodity prices caused by weaker demand from some of the major commodity-importing economies, especially China. Although the effects from a gradual and orderly normalization of U.S. monetary policy should be contained for most of the region, increased capital flow volatility also remains a risk.

Divergent growth dynamics

Growth in the financially integrated economies—Brazil, Chile, Colombia, Mexico, Peru, and Uruguay—in 2014 is expected to remain the same as in 2013, at 3½ percent. However, the average growth number masks considerable divergence across countries (see table).

Mexico’s economy is expected to rebound to 3 percent this year owing to a stronger U.S. recovery and normalization of domestic factors. In Brazil, activity is expected to fall below 2 percent in 2014, as weak business confidence continues to weigh on private investment.

The IMF said the key policy priorities for the financially integrated countries include a careful calibration of macroeconomic policies, a clear focus on reducing financial vulnerabilities, and stepped-up structural reforms to remove obstacles to growth.

Growth in the other commodity exporters—Argentina, Bolivia, Ecuador, Paraguay, and Venezuela—is projected to fall sharply in...