Latin American and Caribbean Economies Register 5% Growth in 2007, with Projections of 4.6% for 2008

PORT OF SPAIN, Trinidad – The positive performance of the world economy is the backdrop to elevated growth underway in the economies of Latin America and the Caribbean. The outlook for regional growth is 5% for 2007 and 4.6% in 2008, following the 2006 growth rate of 5.6%.

So states the new Economic Survey of Latin America and the Caribbean 2006-2007, released today in Santiago, Chile by ECLAC Executive Secretary José Luis Machinea. Should projections for 2008 be borne out, the region’s per capita GDP will have risen by 20.6% (over 3% per year, on average) by the time it completes its sixth consecutive year – since 2003 — of growth.

According to ECLAC, in 2007 the economies of South America are expected to grow by 5.7%, whereas Mexico and Central America will increase by 3.6%. Growth projections for the Caribbean stand at 5.5%.

The report notes that growth registered in the region over 2006 was characterized by two trends: surplus on the balance-of-payments current account and the positive primary balance posted by the public sector.

These surpluses are largely attributable to strong improvements in the region’s terms of trade, which have risen by the equivalent of 3.4% of GDP, especially in South America. Improved terms of trade have contributed to the increase of the trade balance surplus and an upswing in fiscal revenues.

Also in 2006, the volume of exports of goods and services for the region as a whole expanded by 7.3%. This dynamism was helped by US economic growth, in the case of Mexico, and by the unremitting external demand for raw material exports from Latin American and Caribbean countries, in addition to the pace of economic activity and domestic demand in the region, which has spurred intraregional trade in manufactures. In addition, the volume of imports of goods and services surged by 14.2%.

The steady rise in the level of economic activity is reflected in improved labour-market indicators. Not only did the unemployment rate drop from 9.1% in 2005 to 8.6% in 2006, but job quality also rose.

The weighted average inflation rate for Latin America and the Caribbean was 5% in 2006 (down from 6.1% in 2005). Brazil experienced the largest drop (from 5.7% to 3%).

Another encouraging development highlighted by the report is the region’s reduced vulnerability, as reflected in the striking reduction of its external debt burden, as measured both in terms of GDP (in 2006 it shrank from 26.0% to 22.0%) and regional exports (from 101% to 84%). The countries of the region have also expanded their international reserve assets by some US$ 57 billion.

However, not all countries have been able to capitalize upon the favourable external environment. In contrast with South America, export prices of Central American countries and many Caribbean ones (excepting Trinidad and Tobago, and Surinam) have not improved, and trends in their terms of trade and current accounts have been less positive. In addition, gross national income and investment have been more sluggish in these countries, leading to fiscal deficits and greater external vulnerability.

Outlook for 2007

In ECLAC’s view, trends in the international economy and the relative strength of the region’s economies provide grounds for cautious optimism about the near future. However, the recent increase in the volatility of international financial markets is a cause for concern.

Investment continues to be the component of demand that is doing the most to drive growth, and although private consumption is making a steady recovery, it is expected to grow less than national income in 2007 once again, which means that national savings rates should rise further.

Another promising development is the declining unemployment rate, which is expected to slip to 8.3% for 2007, a level similar to rates recorded in the early 1990s.

On the other hand, although the simple average inflation rate for the region was stable in the early months of 2007, it has been picking up in a number of countries, under pressure from both demand and supply sides.

ECLAC notes that the rate of investment is still low in comparison to the levels required by high economic growth sustainable over the mid-term. To support this expansion, the region needs to develop fiscal policies that are more independent of economic cycles.