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Latin America Overview

The notable slowdown in global trade, the most difficult financial conditions and less favorable markets for raw materials in 2013, left many countries in Latin America dealing with a relatively fragile growth: the region recorded GDP growth of 2.6% in 2013, down from 3.1% in 2012, a continuation of the economic slowdown that has been observed since 2011.

However, the growth rates differed considerably by country: Brazil and Mexico, the two biggest economies in the region (around 60% of the region’s GDP), grew only 2.5% and 1.1% respectively, pulling down the region GDP’s growth. Conversely, the other countries evaluated in the ranking had better performances: Argentina grew 3%, Chile and Colombia around 4% and Peru, 5.8%.

The region’s modest growth of 2.6% in 2013 continued to be driven by domestic demand, which added 2.8 percentage points to GDP growth, followed by investment, which contributed 0.9 percentage points. Net exports continued contributing negatively to GDP growth (-0.8 percentage points), a reflection of the slowing growth of China, which impacted negatively in most countries of Latin America with commodity export profile1.Unemployment, another important issue in the region, fell slightly from 6.4% in 2012 to 6.3% in 2013, which also contributed to pressure on domestic demand.

The average inflation rate increased throughout 2013 in the region: in the 12 months to October 2013 the simple average inflation rate was 7.2%, compared with a cumulative 5.5% in the 12 months to December 2012.

In social terms, one important aspect in 2013 was the social mobilization in Brazil against the precariousness of public services, such as transport, health and education, and also other issues such as the high corruption in the government.

An important threat to the region is that if the Federal Reserve (Central Bank of the United Sates) starts raising interest rates, due to a faster recovery of the American economy, it will change the capital flows from the Latin America region to safer countries with higher interest rates. This situation destabilizes the financing of current account balances and would cause substantial fluctuations in interest rates and possibly raise inflation, due to the increase of imported products. As result, the introduction of more restrictive monetary policies may shrink growth prospects in the region.

The challenge for the Latin American region in the coming years is to strengthen its importance on the world economic stage. For that, its countries should raise their competitiveness through diversification, greater logistical performance and positioning within the value chain towards higher value-added activities. They must try to reduce social inequality – which will require investment to modernize infrastructure and social welfare policies – whilst ensuring the income distribution still meets the increasing demand of an emerging middle class.

Eduardo Tomiya

Managing Director Millward Brown Vermeer

1 Source: United Nations / ECLAC – Economic Commission for Latin America and Caribbean / CEPALSTAT – Database and Statistical Publication