Latin America, Caribbean economies expect moderate growth in 2018

The Economic Commission for Latin America and the Caribbean (ECLAC) predicts a moderate recovery for the region with an expected economic growth rate of 2.2 percent next year, following 1.3 percent growth in 2017.

In its overview of the regional economies the organization projected a more favorable international context for economic activity in the region.

According to the report, the global economy will expand at a rate close to that of 2017 (around 3 percent) next year and emerging economies will show greater dynamism than developed ones.

In the monetary sphere, ECLAC believes the current situation of ample liquidity and low international interest rates will hold steady.

In its report, ECLAC, a regional United Nations body, analyzes the economies’ performance, updates its latest growth projections for countries and provides recommendations to foster development with greater inclusion, equality and environmental sustainability in the region.

Domestic demand will play an important role in the acceleration of growth in 2018, although with variations among its components. Private consumption continues to be the motor of domestic demand, but in 2018 investment will make a greater contribution, due to a recovery in gross fixed capital formation, ECLAC said.

At a press conference at the organization’s headquarters in Santiago, Chile, ECLAC Executive Secretary Alicia Bárcena, said: “Although there is reduced fiscal space in the region, we need to promote active public policies to sustain the expansion cycle. These include strengthening regulation, productive development, tax collection and intraregional trade,” she noted. “Spending that has a greater impact on growth and inequality must be prioritized, along with avoiding sharp adjustments in public investment to protect growth in the medium term.”

Despite the more favorable international context, ECLAC highlighted certain challenges and latent risks that could affect the consolidation of growth in the medium term.

The existing uncertainty about a normalization of the monetary conditions that have been implemented or announced by the U.S. Federal Reserve, the European Central Bank and the Bank of Japan is compounded by the trend toward greater financial deregulation.

A possible tax reform in the United States could bring with it greater financial volatility due to an increase in capital flows to that country, ECLAC said.

In addition, there are geopolitical risks, especially those stemming from the increased protectionism seen in some countries and reflected in growing support for anti-globalization parties in some European nations, as well as last year’s vote in favor of the Brexit in the United Kingdom.

The 2018 regional growth figure is partly caused by greater dynamism in Brazil’s economic growth with an expected 2 percent increase following modest growth of 0.9 percent in 2017.

Chile, Colombia and Peru are also expected to accelerate their economic activity next year.

In Latin America, Panama is expected to be the economy with the highest growth rate next year (5.5 percent), followed by the Dominican Republic (5.1 percent) and Nicaragua (5.0 percent). At the other end of the spectrum Cuba, Ecuador and Venezuela are projected to post figures of 1 percent, 1.3 percent and -5.5 percent, respectively, while the rest of Latin America’s economies will expand between 2 percent and 4 percent.

If grouped by subregion, ECLAC predicts greater dynamism in South America (2 percent) than compared to this year (0.8 percent).

Central America, should build on strong growth this year (3.3 percent) and further increase its regional gross domestic product by 3.6 percent.

Meanwhile, the English- and Dutch-speaking Caribbean is forecast to grow 1.5 percent on average next year, following virtually no growth in 2017, boosted in part by reconstruction spending after the Irma and Maria hurricanes caused damage to some of the island countries.

The unemployment rate in the region is expected to come down next year with greater aggregate demand, the report indicates. Between 2016 and 2017, urban unemployment rose from 8.9 percent to 9.4 percent due to an increase in the labor participation rate and stagnation in the employment rate.

ECLAC recommends the strengthening of tax administrations to reduce fiscal avoidance and evasion, which it said totaled $340 billion dollars in the region in 2015.

Countries must also broaden international cooperation mechanisms, evaluate where fiscally prudent the use of public credit and increase investment through public-private partnerships and the redesign of tax incentives for industrial policies.

At the same time, ECLAC concluded, countries must improve the mechanisms for administering public spending and accountability.