From Recovery to Expansion

The recessionary effects of the international crisis on the region’s economies in 2009 were only transitory. The economic growth seen in 2010 reflects the consolidation of the recovery that the majority of the region’s economies began to experience in the second half of 2009. This recovery was accelerated by the impact of the counter-cyclical measures that many of the countries applied. The implementation of fiscal packages aimed at countering the effects of the international crisis was complemented by the rapid recovery of the international economy —led by the emerging economies— in the first half of 2010. As a consequence, levels of economic activity in general are now higher than before the crisis. During the first few months of 2011, economic activity for the majority of Latin American and Caribbean countries has remained buoyant, and ECLAC forecasts that growth in regional GDP in 2011 will approach 4.4%. South America will grow at a higher rate than Mexico and Central America, but the difference in performance between the two sub-regions is expected to decline in comparison with 2010.

The expansion of macroeconomic room for manoeuvre during 2003-08 in many countries of the region led to an unprecedented capacity for carrying out policies to combat the crisis. The strong macroeconomic showing of the majority of Latin American and Caribbean countries in the years leading up to the international crisis marked a significant difference from the usual financial difficulties faced by the region in difficult times. Between 2003 and 2008, these countries took advantage of the boom in the economy and in international finances, consolidating public accounts, increasing their international reserves and reducing and improving their debt profiles. The reduction observed in recent years of non-financial public-sector debt expressed as a percentage of GDP was the result of increased government revenue and economic growth, as well as changes in relative prices. in several countries, the composition of public debt changed significantly, with a higher prevalence of longer-term and fixed-interest debt and a larger share of debt held by residents and denominated in local currency.² all of this created more space for implementing counter-cyclical public policies, enabling unprecedented activism aimed at countering the negative effects of the deteriorating international scenario. It also made the initiation of the recovery in the second half of 2009 possible.³

A significant expansion of several components of GDP accounted for the high growth rate of the region in 2010 and enabled a balanced and strong recovery. The sustained dynamism of domestic demand, both from private consumption and from investment (Figure 1.2), was due to the relatively strong performance of labour markets, growth in real wages, the increase of credit to the private sector, as well as economic agents’ improved expectations regarding the impact of the crisis. Low real interest rates also stimulated both consumption and investment. For countries with large volumes of remittances, their gradual recovery has also contributed to increasing levels of private consumption. Along with buoyant demand, rapid economic recovery was also facilitated by high levels of idle installed capacity, which made it possible to step up production levels quickly.⁴ Gross capital formation expanded to 12.9% in 2010 due to the increase in gross fixed capital investment (9.9%) and inventory restocking. The growth of fixed investment was primarily in machinery and equipment (mostly imported) and was driven by national currency appreciation, widely available credit and lower idle capacity amid burgeoning domestic demand.⁵ 

As a result, the rate of gross fixed investment, measured in constant dollars as a percentage of GDP, increased to 21.4%, above the 20.5% recorded in 2009 but below the 22.1% in 2008 and the maximum levels recorded in the 1970s.⁶

Strong domestic demand led to a significant upturn in the volume of imported goods and services (20.9%), in particular of consumer durables and capital goods. Given the behaviour of exports and imports of goods and services, the contribution of net exports to growth was negative in 2010. in fact, even though the value of exported goods is growing at high rates, in metal- and mineral-exporting countries (and in some hydrocarbon-exporting countries), this growth is mainly due to better export prices, rather than an increase in the volume of exports. For the region as a whole, the favourable external scenario led to an increase in the volume and prices of exports, although growth in imports was even greater, leading to a deterioration in the current account balance from -0.4% of GDP in 2009 to -1.2% in 2010.⁷

Increasing trade with china is another important factor to understand the recent dynamics of Latin American economies. The change in the world economy’s centre of gravity towards the east and the south (above all china and India, but also other emerging economies) has led to a significant increase in trade with this countries.⁸ In the last decade, trade with china has increased substantially in South America. For example, its share in total exports increased in Brazil (from 2% to 13%), Chile (from 5% to 23%) and Peru (from 6% to 15%) during this period. However, china continues to represent a minor proportion of trade, accounting for less than 2% of total exports for most countries in central America and Mexico, while it has become the leading market for exports from Brazil and Chile (up from 12th and 5th in 2000, respectively) and is now the second most important market for Argentina and Peru. at the same time, imports from china have increased considerably in all of the countries of the region (Figure 1.3). Various South American countries, such as the Plurinational State of Bolivia, Chile, Ecuador, Paraguay, Peru and the Bolivarian republic of Venezuela, do not face much competition from china because of their high specialisation in raw materials. Brazil, Colombia, Argentina and Uruguay face more competition from china, but the economies most exposed are those of Central America and Mexico, as they have very similar export structures.⁹ the greater importance of emerging economies in trade relations —in particular china— is an important factor in explaining Latin American resilience during the crisis. It is also a factor in explaining differences within the region in regard to the pace of growth and policy space. This phenomenon, which has been developing since the end of the 1990s, manifests in a higher correlation between economic cycles in South America and china, while the correlation in cycles is lower for Central America and Mexico and has even been declining.¹⁰ therefore, economies with greater commercial ties to china suffered less during the crisis and grew more.¹¹

Trade relations with china also explain the differential evolution of the terms of trade in the region. the greater demand for primary goods tied to Chinese growth is reflected in an increase in the terms of trade in the majority of countries exporting these types of goods —mainly in South America. in the rest of the region, meanwhile, the terms of trade show a declining trend, given that these are oil-importing economies, and some countries, such as in central America, do not produce commodities demanded by the emerging Asian economies (e.g. minerals and soybeans).¹² the terms of trade in South America have been on a growth path since the beginning of the past decade —interrupted only in 2009— and in 2010 reached 60% above the 2000 level, while for central America we see the reverse trend (14% below the 2000 level) (Figure 1.4).

The new opportunities that open up with the trade dynamism of china and other emerging Asian economies also bring new challenges in terms of inflation and external vulnerability. Increases in food and fuel prices often affect the most vulnerable, particularly in urban areas of Central American and Caribbean countries that are not exporters of these goods. In addition, they create inflationary pressures and can have effects on general price levels if they translate into wage increases in a context of strong growth in domestic demand. Finally, economies that now trade more with china are more exposed to the cycles and shocks of its economy. Although it is expected that the Chinese economy will continue to be an important engine for world growth, a slowdown in Chinese growth could potentially have significant effects on the prices and volume of exports, as well as on public finances.