Is a Global Growth Slowdown Threatening Latin America?

Q: Financial markets around the world experienced tumultuous swings following Standard & Poor’s first-ever downgrade of the U.S. credit rating on Aug. 5. An ongoing European debt crisis and forecasts for sluggish economic growth worldwide are also rattling investors. What effects will the downbeat economic sentiment have on Latin American countries? Which ones are most at risk? What can countries in the region do to protect themselves?

A: Desmond Lachman, resident fellow at the American Enterprise Institute: “Latin American economic policymakers should brace themselves for a very rough year ahead. Not only have the risks of a double-dip recession in the United States increased as U.S. fiscal and monetary policy stimulus fades and as U.S. equity and housing prices continue to slump, but the Eurozone debt crisis now also shows every sign of intensifying. This raises the real prospect of major debt defaults in the European periphery within the next six to 12 months, which will severely impact the European banking system. As the European Central Bank itself acknowledges, a series of debt defaults in the European periphery is all too likely to result in a Lehman-style banking crisis in the European core countries. And, if we should have learned anything from the Lehman crisis, it is that a banking crisis in a major part of the global economy tends to have major ramifications for the rest of the international financial system. Major problems in the United States and the European Union, which between them still account for over 55 percent of the world economy, makes it highly improbable that the Latin American economy can decouple from the industrialized countries. For Latin America will be confronted by declining international commodity prices, diminished world trade and a major increase in risk aversion that will reduce capital flows to the continent. Latin America is fortunate to be entering the crisis with relatively strong public finances and enhanced monetary policy credibility. This gives Latin American policymakers the room to engage in countercyclical fiscal and monetary policy. Latin American policymakers should avail themselves of that room to cushion the region from the stormy international economic environment that lies ahead.”

A: Claudio Loser, senior fellow at the Inter-American Dialogue: “Latin America has had a remarkable economic performance in recent years. The region did move in line with the world at large and did much better than the advanced world, although it was behind the major emerging economies of Asia. There are voices that talk about the Latin American decade-of course concurrently, the Africans say the same and in the East they talk about the Asian century. Macroeconomic policies have been good and inflation low, and trade has boomed. A sense of comfort has set in, especially as the region did well during the Great Recession of 2008-09. There is the danger. The United States, Europe and Japan are growing at a dismal rate, and their finances are shaky at best. China is slowing down, concerned about its overheated economy; India is doing well but its finances are far from perfect, and with falling commodity prices, the favorable world winds are off. Furthermore, as The Economist has correctly noted recently, saving and investment in the region are very low, and this will result in lower growth. Thus, expectations are that Latin America, starting with Brazil and Mexico, will see growth declining even in favorable circumstances. The authorities in the region need to reassess their policies in that light, and carry out longer-term macro planning, fiscal discipline and a healthy dose of caution and fear. The Latin Americans now have better policies and performance than in the past. It is now their responsibility to become introspective and determine that they do not have clay feet.”

A: Luis Oganes, managing director and head of Latin America Research at J.P. Morgan Chase & Co. in New York: “While the resilience of domestic demand will provide a cushion for Latin America’s growth near term, lower global growth and commodity prices have the potential to hit the region hard. Except for the global crisis period of 2008-2009, Latin America’s growth has been driven largely by domestic demand since the middle of the last decade, as the region managed to turn supportive terms of trade into a boom of consumption and investment. While these dynamics are still present, growth in some countries is already feeling the pinch from tightening measures to contain inflation, weaker external demand and strong currencies. This is particularly the case in Brazil, where we have revised down our 2011 GDP growth forecast to 3.4 percent from 4.0 percent on the back of disappointing industrial production performance in this year’s second quarter and a downbeat start of the third quarter. We have also cut the growth forecast for Mexico (to 4.2 percent from 4.5 percent) even though it has been benefiting from the relocation of manufacturing from other countries-particularly in the auto sector-because it is the most vulnerable to the U.S. slowdown with over 80 percent of exports going north. The downward revision in Peru (to 6.3 percent from 6.6 percent) is partly explained by its exposure to commodities and the deceleration of private investment due to electoral uncertainty. Growth forecasts in other countries have not been cut for now (Colombia’s was actually revised up to 5.3 percent from 4.9 percent given the strong second quarter result), but risks are on the downside. Overall, we now expect Latin America to grow by 4.3 percent year-over-year in 2011 (from 4.6 percent previously) and 3.7 percent in 2012 (from 3.9 percent before). Further downward revisions would be necessary if the United States falls into a double-dip recession and/or if China’s growth and commodity prices decelerate even more.”