External Demand to Bolster LATAM Economy in 2014

The economies of Latin America and the Caribbean may expand by 3.2% in 2014, with business activity in Brazil and Mexico showing signs of picking up steam, according to the United Nations economic body for Latin America.

Although increasing foreign investment is still a challenge in many LATAM countries, external demand is most likely to boost the region’s export sector in 2014.

For Latin America and the Caribbean, 2014 will bring both opportunities and challenges, according to Alicia Bárcena, executive secretary of ECLAC, which had forecast 2.6% growth for the region in 2013.

 “Opportunities include increased international trade and the possibility of harnessing currency depreciations to ensure sustained changes in relative prices. This – along with industrial policies to support growth, boost regional integration and help small and medium-sized enterprises – could help to increase investment in diversifying production in tradable goods and to reduce the region’s structural heterogeneity,” Bárcena said.

The threats facing the region include ongoing volatility in the global economy and higher external financing costs, as well as a smaller contribution by consumption to GDP growth and a worsening regional current account.

Regional growth in 2014 will be led by Panama (with 7%), followed by Bolivia (5.5%), Peru (5.5%), Nicaragua (5%), Dominican Republic (5%), and Colombia, Haiti, Ecuador and Paraguay (all four with 4.5%). Growth is predicted to be 2.6% in Argentina and Brazil, 4% in Chile and Costa Rica, 3.5% in Guatemala, Mexico and Uruguay, and 1% in Venezuela.

Investments in infrastructure and energy sectors are likely to yield high dividends for the Brazilian economy in 2014. “Next year, the Caribbean will experience a recovery and post a figure of 2.1%,” stated the UN agency.

In terms of the labor market, the unemployment rate has remained more or less stable, going from 6.4% in 2012 to 6.3% in 2013. This dip, according to ECLAC, was caused by a lower overall labor participation rate. Inflation remained below 5% in most of the region’s countries.

A widespread worsening of the terms of trade – on the back of continued commodity price reductions – contributed to the balance-of-payments current account deficit widening from 1.8% of GDP in 2012 to 2.5% in 2013 (mainly as the result of a higher increase in merchandise imports relative to exports).

The report highlights economic policies of some countries aimed at shoring up internal demand and tackling international financial volatility: “Some countries reduced their benchmark interest rates (except Brazil), while others encouraged the stable growth of monetary aggregates (or total money circulating in an economy).”