NS4540 Winter Term 2016 Latin America: Recovery 2016 Federal Reserve Bank of Chicago, Strong Dollar Weak Dollar

Overview Oxford Analytica, Latin America: Recovery Will Prove Elusive in 2016, December 30, 2015 New report by UN ECLAC shows region’s GDP contracted by 0.4% in 2015 Growth slowed for a fifth consecutive year Growth anticipated at 0.2% for 2016 Impacts Brazil’s forecast 2.0% contraction in 2016 partly reflects and will continue to reflect the country’s political crisis., 0.8% forecast for Argentina depends on the new government’s success in reactivating investment If private consumption and investment continue to contract, region’s labor markets will weaken again next year. 0.4% contraction reflects a 1.6% contraction in South America, down from growth of 0.6% in 2015 – led by negative growth in Brazil and Venezuela

Deteriorating Outlook I Causes of the deteriorating outlook Sluggish international growth Global growth slipped to 2.4% in 2015 down from 2.6% in 2014 While global growth may increase to 2.9% in 2016 – impact on Latin America commodity exporters muted by decrease in China’s growth – 6.4% 2016 down from 6.8% in 2015 and 7.3% in 2014 Commodity prices After falling sharply in 2015, may stabilize in 2016, but enough to be of much help in stimulating LAC growth

Deteriorating Outlook II Financial Markets Higher rates of interest in U.S. will increase the financing costs of LAC governments and companies and Slow the inflow of capital to LAC Currency Depreciation Higher U.S. interest rates suggest ongoing depreciation of LAC currencies against the dollar Despite sluggish growth this may prompt central banks, especially in South America to tighten monetary policy in face of inflationary pressures – already occurred in Chile and Colombia

Deteriorating Outlook III

External Developments External Sector Performance Trade deficit widened to $38 billion up from $4 billion in 2014 Reflects a 14% drop in value of exports First time since 2001 region has run a deficit on trade in goods for two consecutive years since 2001 $107 billion foreign investment in 2015 represents drop of 22% Inflow of portfolio capital – bonds and shares dropped 40% to $70 billion

Key Domestic Indicators I No good news here either Private consumption contracted for first time since the 2009 crisis 0.3% drop overall 1.6% in South America Public consumption has risen by 0.7% 0.1% in South America Investment – gross fixed capital formation contracted by 4.2% in 2015 7.2% in South America Lowers region’s investment down from 21.5% of GDP in 2013 to 20.0%

Key Domestic Indicators II Employment Urban unemployment rate increased to 6.6% up from 6.0% in 2014 Signs of deterioration in job quality – increase in own-account work Inflation Little change except for Venezuela Currently around 6% for entire region While inflation dropped in Mexico, Central America and the Caribbean, South America has seen increase to 8.5% from 7.6% in South America

Key Domestic Indicators III Fiscal Accounts For first time since 2009 all LAC countries running a fiscal deficit May reach 3.3% of GDP (including debt servicing) Brazil may reach 8.3%

Sub-Regional Differences I Growth has decelerated in all South American Countries except Argentina, Chile and Peru Only Brazil and Venezuela have contracted – forecast to do same in 2016 If these two countries are excluded – South America's growth has held steady over the last three years. Mexico has seen a gradual acceleration from 2.4% in 2014 to 2.5% in 2015 and forecast 2.6% in 2016 at 2.3% inflation is the lowest in 45 years despite currency depreciation Benefitting from weaker prices for its commodity imports and stronger U.S. demand Central America also seen a sustained increase in growth may be slightly lower in 2016 Private consumption and investment in contrast to contraction in south America have expanded by 4.6% and 7.0% in 2015

Sub-Regional Differences II Lower commodity prices have also benefitted most Caribbean countries Despite an acceleration in growth which is expected to last into 2016, region burdened by extremely high debt