Economic Survey of Latin America and the Caribbean 2005-2006

Latin America and the Caribbean will grow by around 5% this year, according to the Economic Commission for Latin America and the Caribbean (ECLAC). This is the second time in 25 years that the region will see four consecutive years of growth, with the regional GDP posting a cumulative rise of 17.6% (an average annual increase of 4.3%) and per capita GDP, a 12% increase.

Despite substantial improvement over the last quarter-century, Latin America and the Caribbean continue to show less dynamism than the rest of the developing world.

The year 2007 will see regional GDP growth of about 4.5%, within the context of a moderate slowdown of the world economy, according to ECLAC projections.

This economic expansion will be spread across Latin America and the Caribbean, ranging between 3.5% and 6.5% for most countries. The exceptions are Argentina, the Dominican Republic and Venezuela, with growth rates over 7.5%, and Haiti, at about 2.5%.

The Caribbean nations are expected to grow by 6.3%; South America by 5.4%; and Mexico and Central America by some 4.1%.

The region continues to show a current accounts surplus, albeit with sharp differences among countries. Particularly noteworthy is the negative impact on current accounts in Central America and most Caribbean nations from higher oil prices.

Accompanying this trend in current accounts is an upturn in public sector accounts which makes these economies less vulnerable to possible external shocks, states ECLAC's Economic Survey of Latin America and the Caribbean, 2005-2006, presented today in Santiago, Chile. ECLAC views this reduced vulnerability to external shock as a development of great relevance.

In contrast to previous cycles of growth, governments have avoided expansionary fiscal policies, opting to build up primary surpluses and pay down debt. The current phase is noteworthy for the decreasing dependence of regional countries on external saving and the greater speed with which they are reducing their debt, ECLAC states.

Steady expansion of the world economy and abundant liquidity on international capital markets have helped bring about increased exports and better terms of trade for South America, Mexico, and Trinidad and Tobago. While the remaining Caribbean countries and Central America saw their terms of trade deteriorate, they did benefit from remittances sent by emigrant workers, as did Mexico.

Factors of uncertainty in the world economy, including the greater volatility of markets facing fears of increased inflation, the latent risk of a sharp adjustment of global imbalances and rising oil prices, could dampen global growth. An additional factor is the concern generated by escalating warfare in the Middle East.

Nonetheless, the economic performance and macroeconomic policies seen in Latin America and the Caribbean over recent years provide for a "safety margin" in the event of changes in external conditions, provided these are moderate, ECLAC states.

Labour markets, inflation

Economic growth has had a favorable impact on labour markets and the employment rate. The 2005 rise of 0.5 points takes the rate up to 53.6% of the working-age population. While this is still below its 1997 level, the good news is that expansion in employment is taking place in the formal sector.

The unemployment rate fell to 9.1% at the end of 2005 and remained under 9% over the first semester of 2006. While the rate is at its lowest since the mid-1990s, 18 million people in the region are jobless.

Keeping inflation (at 6.1% in 2005) under control remained a concern for most central banks. Despite rising international oil prices, appreciation of almost all national currencies in the region has helped rein in the pace of price increases.

While the combination of slightly lower commodity prices and somewhat higher real exchange rates could pose a challenge to public finances, the ECLAC report states, it could also encourage countries to move toward more diversified and knowledge-based patterns of specialization.

ECLAC believes that defining the region's style of growth over the coming years can open the way for productive policies. At the same time, it is necessary to increase the investment rate that, despite its significant recovery, remains insufficient to guarantee the sustained growth that Latin America and the Caribbean require to alleviate the region's social needs.