The prospects for the global economy have changed from a situation of healthy and broad growth in the large economic blocs to a more differentiated view of growth prospects, with significant risks clouding the horizon. Looking at the 12 months from Q3 2017 to Q3 2018, growth in the United States was 3%, but many expect this relatively high rate to slow in 2019 as fiscal stimulus eases and lower interest rates. growth in other parts of the world affect the US. and interest rates are rising to ensure that wage inflation does not influence prices and undermine the 2% inflation target. In China, growth has slowed as the economy rebalances from an economy dominated by exports and investment to a higher share of consumption. In Europe, growth is expected to slow to around 2.2% in 2019 from around 2.4% this year.
Growth in Latin America and the Caribbean is driven by global trends, domestic factors and their interactions. Unfortunately, growth in the region this year is expected to be the slowest of any major region at just 1.2%, compared to the 1.6% expected in July. This downgrade is largely due to weaker growth in Argentina (which will experience a significant recession this year) and Brazil (with slower positive growth), while the situation in Venezuela, which continues to experience a severe economic crisis, has reduced the regional average pulled down. The region as a whole is expected to grow, but only 2.4% in 2019 – see Figure 1.
Figure 1. Weaker global growth forecast
Big differences between countries
However, these regional numbers hide large differences between countries. In fact, the dispersion of income levels has increased – see Figure 2, which shows GDP per capita in dollars (at current prices) for a selection of countries. A group of high-performing countries (Chile, Panama and Uruguay) surpass per capita GDP at current prices of USD 16,000 (in 2018) and project a per capita GDP of around USD 20,000 by 2023. A second group advanced on this indicator, but from a lower base (including Dominican Republic, Paraguay and Peru). In the case of Peru, per capita GDP is projected to be close to US$9,000 in 2023, while it was just over US$6,000 in 2015 – and just US$2,000 in 2002.
Figure 2. Selected growth rates: increasing dispersion
Source: WEO-IWF, October 2018
Countries with highly flexible exchange rates, such as Colombia and Mexico, saw their revenues drop when their currencies were devalued in 2014-2015 to protect their economies from falling commodity prices. Mexico's per capita GDP in US dollars dropped from 11,000 in 2014 to 8,800 in 2015, but is expected to recover to over 11,100 by 2023. Argentina and Brazil have seen even more volatility in this indicator. Argentina's per capita income dropped from US$10,700 in 2018 to around US$9,200 in 2018, almost equal to that of Brazil. Both countries are predicted to have a per capita income of more than $10,800 by 2023.
The impact of various crises
The Venezuelan crisis is clear with this measure. By the end of 2018, Venezuela's GDP per capita will have dropped by more than 70%, from its peak of US$11,500 in 2011 to just US$3,300. The case of Jamaica is also worth mentioning. In 2010, Jamaica had a per capita GDP of around US$4800 but was suffering from a severe financial crisis that reset the domestic debt. GDP per capita in 2018 is $5,400, reflecting steady progress. Remarkably, this was achieved with an annual primary surplus of around 7% of GDP and debt falling from 140% to around 100% of GDP. This has to be one of the most successful reprofiling and fiscal consolidation programs to date.
Each indicator has its advantages and disadvantages. GDP per capita in dollars at current prices indicates purchasing power using a standard global measure, but ignores local prices. An alternative way to see how countries fared is to look at how each economy's output (GDP) evolved in dollars, but using so-called purchasing power parity-adjusted exchange rates. Broadly speaking, this means that given prices in each country and in the US, real exchange rates are adjusted to a level that can be considered equilibrium. One way to compare countries is to see how each country's share of global output has changed according to this metric. However, as the ratios vary so much, to simplify the presentation I have normalized the ratio of each economy to 1.0 in 1980 – see Figure 3.
Figure 3. Many countries are losing share in global production
Falling share of world production
Most countries have seen their share of global production decline. During the 1980s, known as the lost decade, the typical country among the 26 borrowing members of the IDB lost about 20% of its global manufacturing share. However, the figure also shows increasing dispersion. Panama, Dominican Republic and Chile stand out as the countries that have managed to gain global share since 1980. Colombia, Paraguay and Peru have almost regained their 1980 shares. But there are many countries that continue to lose shares. Venezuela lost about 40% of its share of global production between 1980 and 2012, and by 2023 its share of global production is projected to be just 20% of the 1980 value. Figure 1 also suggests that the region as a whole will continue losing its share of global output in 2019 as projected global growth outpaces that of the region.
These predictions are subject to considerable risk. The US stock market has dropped significantly since its peak in September 2018, possibly reflecting the expected slowdown in growth, but also amid uncertainty surrounding the relatively open global trading system and the ongoing process of monetary normalization. In Europe, concerns over Italy's fiscal position are weighing on markets, as is Brexit. For China, there are risks to the gradual transformation of the economy, in particular the indebtedness of some state institutions and a change in global trade rules.
The countries that were most successful in dealing with global shocks were those that maintained economic stability by keeping fiscal deficits, debt levels and inflation in check. Many countries in Latin America and the Caribbean have experienced a combination of international shocks and national vulnerabilities.
Panama is an exceptional case where growth has been driven by significantly higher investments, including in infrastructure. But as verified inMacroeconomic Report for Latin America and the Caribbean 2018, investments need to be larger and more productive to drive regional growth. The 2019 report, to be published in March, will examine how countries can maintain economic stability while facing higher global interest rates and a possible slowdown in capital flows, while focusing on how to increase infrastructure investment and how to select those investments with greater influence on the result.
Andrew Powell is the Senior Advisor to the Department of Research (RES). He has a Ba, MPhil. and DPhil. (PhD) from the University of Oxford. Until 1994, he devoted himself to the UK academic world as a Research Fellow at Nuffield College, Oxford and Associate Professor (Professor) at London University and the University of Warwick. In 1995, he joined the Central Bank of Argentina and was named Chief Economist in 1996. In the late 1990s, he represented Argentina as a member of the G20/G22 and as a member of three G22 working groups (crisis resolution, strengthening the financial system and transparency). 🇧🇷 In 2001 he returned to university and joined the Universidad Torcuato Di Tella in Buenos Aires as Professor and Director of Graduate Programs in Finance. He has been a visiting fellow at the World Bank, the IMF, and Harvard University. He joined the IDB Research Department in 2005 as Chief Research Economist and served as Regional Economic Advisor for the Caribbean region in 2008 before returning to the Research Department as Principal Consultant. He has published numerous scholarly articles in leading business journals in areas such as commodity markets, risk management, the role of multilaterals, regulation, banking and international finance. Current projects include new documents on capital flows and corporate balance sheets, sovereign debt restructuring and preferred creditor status for multilateral development banks.
Very good on Latin America, but more needs to be said in a report on Latin America and the Caribbean.
Thank you for sharing this valuable data.
Thank you for visiting and reading our blog, Fernando.