Tuesday, January 6, 2015

Growth forecasts and Latin American underperformance

The Economist's growth forecast is out, available here. 2.9% for the global economy, somewhat below the IMF's forecast (in WEO, not sure if they updated that) of 3.8% for 2015. Map below shows that now the dual recovery is more complex. The US for one seems to be growing at a faster pace, even if the benefits are not felt by the vast majority, and the labor market is less tight than official unemployment indicates. Europe, and Japan continue basically stagnated.
On the other hand, most of the periphery will grow healthily. China's slowdown seems to be to a still impressive 7% or so. What region among the developing ones is the underperforming, you may ask. Drum roll, wait for it... yes, no surprise, Latin America [and for those that think that political instability matters a lot, note that the MENA region will do better]. On this one the IMF is in the same ballpark, as is ECLAC.

There are certainly effects from lower terms of trade, caused by lower commodity prices, but those are not evenly divided, and some countries in the region might actually benefit from lower energy costs (not the net exports of oil for sure; so Venezuela is in trouble). But not all countries in the region have been forced to slowdown for balance of payments problems. In fact, I would argue that so far this would be the exception.
While it is true that for the region as a whole the current account balance has deteriorated (as can be seen above, to around 2.3% deficit with respect to GDP; from ECLAC), it is still the case that low rates of interest in advanced economies (even in the US, if they increase, the likely scenario is that they will remain low) implies that the CA is within the sustainable range. In fact, Brazil, with a higher CA to GDP deficit than Argentina, should not have (and we are talking in the short run here) any trouble to finance its deficit even if it increased as a result of more expansionist policies (don't worry, that's not happenning anyway). And the reason Argentina (the main exception in the region) might not be able to grow more with a CA deficit that is relatively small is associated to the Vultures, and the lack of access to international financial markets (something that might or not be solved this year, which is also an election year).

So why is the region underperforming, if the CA is not in this particular circumstance a barrier to economic growth? As noted by Esteban Pérez here (and discussed here too), the problem in Latin America is that expansions tend to be weak when compared to other regions (including the last boom from 2003 to 2008). In other words, the macroeconomic stance in the boom tends to be excessively timid (sometimes outright contractionary), reducing growth in the expansionary period. This is fairly evident in the case of Brazil, where a fiscal adjustment is now in place (imposed by a left of center government without any pressure from the IMF, one might add), when the economy is almost stagnated and inflation is around the upper limit of the inflation target (6.5%), which is certainly not excessive, and unlikely to be the result of excess demand.

As I often say to my students, in Latin America we do not need the IMF anymore. We have internalized it. Many heterodox economists are for devaluation and fiscal adjustment, the old mantra of the IMF, now disguised as progressive economics. Oh well.

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