Latin America’s economies are well placed to survive slowdowns in the US and the eurozone, although widening current account deficits could scupper the region’s buoyant growth prospects, the International Monetary Fund and World Bank have said.
Currently coasting on high commodity prices and bond market inflows, the region is forecast to grow, on average, more than 4 per cent this year and to slow slightly from that in 2012. The IMF forecasts that Brazil, the largest economy, will grow 3.8 per cent in 2011 and 3.6 per cent in 2012, the same as Mexico, the second-biggest economy.
Last year, the region as a whole grew 6 per cent. But its fastest-expanding economies are increasingly bumping against capacity constraints, so in some ways a gentle slowdown is welcome.
Currently, “growth remains above potential, and a number of indicators …suggest that some economies may be overheating”, the IMF said in its World Economic Outlook.
The IMF pointed to the risks of a recession in the US – which could hit Mexico, the Caribbean and Central America hard. A slowdown in China could also lead to a drop in commodity prices, which would damp South America’s boomiest commodity producers, such as Argentina and Peru.
That, in turn, could lead to rapid capital outflows, which would force a sharp adjustment of exchange rates and wider current account deficits. However, high levels of foreign reserves were a bulwark against this, and credit default swap spreads suggested some economies, such as Chile, Peru and Colombia, were more creditworthy than France.
Despite the relatively rosy immediate outlook, the World Bank warned there were few signs that South America’s increasing reliance on exporting minerals and agricultural goods, especially to China, was increasing productivity – a necessary source of long term growth.
The bank said one sign of Latin America’s struggles to boost productivity and escape the “middle income trap” was a steady fall in the returns on higher education.
This in part was due to a more educated workforce, which meant the premium wages previously earned by graduates were being eroded by a greater supply of skilled workers. Yet east Asia’s experience showed a steady increase in returns on education, which suggested that Latin America’s education system was failing to produce the skills companies required to compete in “new economy” industries.
The one exception was in the commodity sector, where there had been “significant movement up the value chain”.
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