CARACAS – Latin America is expected to emerge from recession this year. But the region should not be overly optimistic. While economic growth is rebounding, it remains below 2%, on average. And in a global environment plagued by uncertainty, the balance of risks is not tilted in Latin America’s favor.
The region’s economy is highly sensitive to global developments. In past decades, external tailwinds underpinned high growth rates; now, external headwinds are hampering growth for a second consecutive year, such that Latin America is underperforming any other emerging region.
Still, 2017 will be better than 2016, when economic performance suffered as a result of China’s slowdown and anemic recoveries in most advanced economies. Fears that Chinese GDP growth would continue to decelerate created shockwaves in financial markets and drove down commodity prices and asset prices in emerging markets. And while investors’ concerns dissipated somewhat as China’s economy stabilized over the course of the year, capital still continued to flee emerging markets for safer havens.
The United Kingdom’s “Brexit” referendum in June, and Donald Trump’s election as US president in November, only created more uncertainty and market volatility. Changing dynamics in the global economy made external financing more expensive. And, as Latin American countries’ currencies weakened, its external and fiscal accounts were stretched thin, narrowing the scope for countercyclical stimulus measures.