Finance ministers and central bankers from around the world are landing in Lima this week for an annual meeting of the IMF and World Bank. Unfortunately, some of those with the shortest flights have little to celebrate: Latin America’s economy is in a recession. This week the UN’s Economic Commission on Latin America and the Caribbean (ECLAC) cut its projection for GDP growth from 0.5% to -0.3% in 2015. If the downward revision holds, it will be the first time the regional economy has contracted since 2009.
Behind the data
GDP is probably the broadest metric of economic activity, and as such it’s bound to gloss over important details. Indeed, many countries in Latin America continue to notch healthy rates of economic growth. GDP growth throughout Central America (not including Mexico) is expected to be 4.1% this year and 4.2% in 2016. Panama is the fastest growing country in Central America; Guatemala and Nicaragua are on a solid 4-4.5% GDP growth path, too.
In fact, if you strip out Brazil and Venezuela, both of which are mired in deep recessions, the Latin American economy would be on track for 1.7% growth this year. That’s not stellar, but it’s hardly a bust in this era of “the new mediocre.” And this year’s recession is likely to be followed by a return to positive growth of 0.7% in 2016.
So, the regional figure is misleading when it comes to select markets, but the recession is an ominous sign elsewhere in Latin America.
Latin America’s slowdown has been underway since 2012. Many Latin American governments frittered away revenues during the high-growth days of the 2000s. In this context, two points warrant consideration.
First, Venezuela, Argentina and Brazil all have high levels of inflation and debt, which means today they have a limited ability to enact the countercyclical policy needed to boost ailing economies. Political pressure makes government action likely, but given that sound macro policies take time to offer relief, presidents facing recession may well resort to more populist ploys, including harassment of business or new regulations that complicate business operations. Going forward, nearshore investors would do well to adopt a more complete view of risk to include political instability and regulatory hurdles.
Second, despite the regional recession, a number of economies with large nearshore operations are sound and will continue to record steady growth of around 2.5% or greater this year and next. This includes Mexico, Peru, Colombia, Uruguay, Costa Rica, Belize, Guyana and Chile. Expect business conditions to remain stable and welcoming in these markets.