Be under no illusion, a real upturn in the world economy is not yet in view. However, signs that the downturn is coming to a halt have been enough to boost markets and cheer doom-weary news headlines, encouraged by policymakers running out of options to provide further stimulus. If activity does stabilize over the summer it may be realistic to see prospects for a true upturn by the end of the year - but guarded optimism is appropriate.
While many developing countries are still grappling with the substantial impacts and aftershocks of the last six months' turmoil, the deep recession in the OECD is likely to take longer to turn around. Forecasts have recently come to terms with the scale of the recession and there may even be some potential upside for economies such as China and Korea which have both shown a significant response to large fiscal and monetary stimulus packages. By contrast, in the short-term Latin America and the Caribbean could see further downgrades, as examined in a new Chatham House working paper which examines the regional economy.
Economic Losses Still Mounting
Cumulative losses due to the recession will continue to mount in spite of high hopes that economies will bottom out over the second and third quarters of the year. In particular, forecasts for Latin America and the Caribbean have been amongst the slowest to adjust and analysts are still getting to grips with the likely scale of this year's recession. Further substantial downgrades should be expected as current indicators point to losses of at least 2% in regional GDP for 2009 but potentially as much as 4.5%.
These GDP estimates are significantly dragged down by Mexico's performance, which will likely suffer a contraction of no less than 6% even without taking into account the additional costs that will be imposed by reactions to the swine flu epidemic. Furthermore, Argentina and Brazil may also witness significant deteriorations if recent hints of recovery in export and industrial sectors prove to be only temporary. Overall, the regional performance would be worse than the latest consensus estimates for a mild 1-1.5% fall, itself a very recent revision to rosy scenarios for near zero or even positive growth in 2009.
Unless the global economy starts to regenerate growth very quickly, which seems almost impossible when stabilization is seen as an optimistic forecast, then the Latin America and Caribbean region's performance is unlikely to improve until the end of 2009. In fact, current indicators suggest that the initial impact of the recession will be comparable only to that experienced in the 1980s debt crisis, when GDP growth dropped as much as -2.5% in 1983. Although the decade-long stagnation which followed during the 1980s and early 1990s is unlikely to be repeated - given the region's strengthened fundamentals - the current recession may look very similar and possibly worse than 1983.
Reverberations of the financial crisis have been seen in tumbling capital flows (including FDI) and restricted credit access, despite regional banks having little involvement in sub-prime debt and derivatives markets. Exports have seen big losses linked to the collapse in world trade and commodity prices. Sharp falls in travel and tourism, other services trade and migrants' remittances have also damaged the balance of payments and cut household incomes and spending in the region. Unemployment and poverty are also on the rise. While some of these revenues could begin to improve rapidly on even a mild rebound in global trade and services demand, the impact of unemployed migrants returning home and local job losses will take much longer to turn around. In addition, world investment will remain at risk of a long weak period linked to the financial crisis and strains on government budgets and debt.
As if these negative effects from the global recession were not enough, the consequences of Mexican swine flu now have to be contended with. Even if the health threat is low and cases quickly fade out, additional losses in local consumer spending as well as tourism caused by the scare will be a significant blow not only for Mexico (which could have 1 percentage point knocked off this year's GDP growth rate from the effect on Q2 alone) but almost certainly throughout Central America and the Caribbean. If WHO fears of a serious flu pandemic were to be realized, the global economy would suffer yet another year of deep recession in 2010. The Latin America and Caribbean region would be severely impacted, with the tourism centres particularly hard hit.
Scope for Swift Recovery in the Major Economies of Latin America
Despite economies heading into a worse than expected recession in 2009, greatly improved regional fundamentals should enable a swifter and smoother recovery than previous global recessions. On the whole, external government debts are less burdensome and inflation remains under control. Confidence can be illustrated by the improved performance of risk indicators such as the local interest rate premium in international markets, which has increased only slightly compared with past spikes. While there may be some disappointment about short-term performance, hopes for a relatively robust recovery are well founded. Only if these expectations fail will there be a serious risk of larger spikes in risk premia and a return of financial instability in the region.
Consensus forecasts point to a rapid return to average growth of at least 3% by 2011. GDP may possibly move back to positive growth in early 2010 provided there is a recovery in the industrialized economies and WHO concerns over a potential recurrence of the swine flu threat are not realized. However, the long-term outlook for the Latin America and Caribbean region contains substantial risks that need to be addressed once the short-term economic crisis is over.
In spite of strong GDP growth in recent years, income inequality and poverty have remained critical flaws in the socio-political fabric of the region. Such problems have been highlighted by both the drugs wars and the swine flu outbreak in Mexico. If these issues are not addressed then underlying tensions will continue to simmer, threatening the socio-political system and posing risks for law and order. Outbreaks of instability may well return in the future. Ultimately this Achilles heel of the region will have to be addressed sufficiently to ensure stability and an improved natural level of security, which will be the long-run requirement for sustained economic progress and growth.
From Steady Growth to Sudden Crisis: How Latin America and the Caribbean Are Coping with the Global Recession
Rodrigo Delgado Aguilera and Vanessa Rossi
Working Paper, May 2009