Economic Trends -Latin America-

September 10, 2009

Trends is a quarterly online Newsletter intended to inform readers about the ensuing developments in some Latin American economies. The global recession has affected Latin America in varying degrees, from Mexico where it has been quite severe to Argentina and Colombia where it has not been as hard felt. There is no doubt that 2009 will end up being one of the worst years of the current decade for Latin America. As the graph shows the largest economies in the region are already showing signs that there may be a recession in the making.

For instance, Colombia has started to show signs that the lag may be now waning with the economy entering a recession with classic signs of weakness such as higher unemployment, a fall in consumer prices and negative first quarter growth. What the current crisis has shown is that the region is still highly dependent on the world's largest economy and that the so called de- coupling is more an illusion than a reality. Indeed, some economies may have been able to initially offset the effect of the U.S. recession but eventually are going to be affected.

Given the situation, in 2009 we are likely to observe increased fiscal deficits, reduced inflation if not deflation, low rates of economic growth and increased unemployment throughout the region. As a lagging unemployment is likely to be higher at the end of the year than the current level. The downturn is also showing some economic principles at work, such as the trade-off between inflation and unemployment and hoe the Phillips Curve is well at work.

For instance, Colombia has started to show signs that the lag may be now waning with the economy entering a recession with classic signs of weakness such as higher unemployment, a fall in consumer prices and negative first quarter growth.

What the current crisis has shown is that the region is still highly dependent on the world's largest economy and that the so called de-coupling is more an illusion than a reality. Indeed, some economies may have been able to initially offset the effect of the U.S. recession but eventually are going to be affected.

Argentina

GDP Growth

Argentina's economy has enjoyed high rates of economic growth since 2003. However, growth is beginning to soften. As the graph shows first quarter growth has been higher every year than in 2009 and second quarter growth may be lower given current trends. It is yet questionable whether growth will be negative or just mediocre. In any case, the country will probably not face a major recession similar to that seen over 2001-2002.

Prices

If the inflation rate is any indication of the direction of aggregate output, then we could say that the downturn will probably intensify in the second quarter of 2009. Both, the accumulated and the annual rate of inflation, as of July, were lower than in 2008. Also, monthly inflation rates were lower every month during the second quarter than those witnessed over the same period of 2008. Thus, although prices are increasing at a lower rate, they are not declining like in other countries.

Unemployment

Given the GDP growth and inflation conditions, unemployment is on the increase as would be readily expected. Some of the gains of the period 2002- 2008 have been eliminated but yet the labor market picture in Argentina is better than in other regional economies where the unemployment rate is well above 10%.

Brazil

Probably Brazil's economy has been one of the most stable in Latin America over the past eight years, showing declining inflation and unemployment rates and growing every year.

GDP Growth

As opposed to Colombia and Argentina that had a recession in 2002, Brazil grew although at a slower pace than in consequent years. First quarter growth for 2009 was negative at -1.8%, but given its resiliency the Brazilian economy will probably recover earlier than others. Both government and private sector consumption grew in Q1 with fixed capital formation explaining most of the downturn. Given the slack in world demand it was expected that private sector investment would contract to adjust to a new reality.

Prices

The inflation rate for every month in 2009 has been lower when compared to that for the same month of 2008. Cumulative inflation for 2009 as of July is almost 3% when in 2008 was close to 5% over the same period. This means that inflation in 2009 will probably be much lower than in 2008 implying also a weaker economy with inferior growth and higher unemployment rates. However, the end of the recession in the US and Europe will mean improving world demand that may contribute to higher inflation in the last quarter.

Unemployment

The Brazilian rate of unemployment has not increased during the current downturn. While in July of 2008 was 8.1% in July of 2009 fell to 8.0%. However, it is quite possible that given the lower investment of the first quarter of 2009, unemployment eventually increases.

Colombia

This section shows some general trends of the Colombian economy over the past few years.

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GDP Growth

The Colombian economy decelerated significantly beginning in the first quarter of 2008 and started shrinking in the first quarter of 2009. Second quarter growth for 2009 is not yet known but it is possible that it will be negative again. Despite the severity of the global downturn it has not been as affected as other emerging economies.

Prices

The inflation rate has been declining over the past few months and in June and July the overall price level contracted slightly. This means that accumulated inflation as of July is only 2.2% whereas last year was 6.5%. If one could rationalize the CPI as a leading indicator, this would mean that economic growth over the second quarter is probably going to be weak.

Unemployment

At the beginning of 2009, the unemployment rate increased significantly but as of July declined to 12.6%. The overall trend, since 2001 is very encouraging although the current downturn could have a significant impact on the long term unemployment rate. It is expected that unless the economy starts recovering the labor picture will deteriorate again.

Debt Dynamics

At the end of the first quarter of 2009, the stock of external debt, as a percentage of GDP, was similar to the one observed in 1995. However, in dollar terms external debt went from roughly US$26 billion in 1995 to US$47 billion over the same period. The graph shows how, as a percentage of GDP, debt increased until 2001, then declined continuously until 2008 and rose slightly in Q1 of 2009. It is quite possible that at the end of the current year external debt will have increased both in dollar terms and as percentage of GDP given the need of more government financing and the economic downturn.

Mexico

In Latin America, Mexico has been the country most affected in terms of economic growth by the global financial crisis and recession.

GDP Growth

First quarter growth for Mexico was less than -10%, which is one of the worst quarters in history. Although there was a recession in 2001, the economy improved in 2002 but, except for 2006, growth never increased to acceptable levels. This implies that the decade has not seen much of an increase in per-capita income. Because there have already been three quarters of negative growth, it is possible that as the U.S. economy improves it will pull Mexico too out of the recession.

Prices

The sluggish economy has contributed to lower inflation. Accumulated inflation for the year 2009 at end of August is 1.79%, which is 140 basis points less than what had been accumulated during the same period of 2008. Even though, the annual rate of inflation has not dropped as much, it is quite possible that at the end of the year will be below 4%.

Unemployment

The unemployment rate in Mexico throughout the decade had stayed below 4%. As of July it had climbed above 6% and probably will continue to rise as employers adjust to the new economic environment. Despite this, Mexico has one of the lowest rates in the region.

Debt Dynamics

External debt (public and private) had been falling in dollar terms from a level of close to US$140 billion to just above US$100 billion by 2006. Since then, it has climbed again to a level approaching US$130 billion. Much of this increase has come from private sector debt since most of public sector net financing is taking place domestically.