POSITIVE SIGNS OF ECONOMIC GROWTH IN LATIN AMERICA AND THE CARIBBEAN

POSITIVE SIGNS OF ECONOMIC GROWTH IN LATIN AMERICA AND THE CARIBBEAN

The economy of Latin America and the Caribbean grew 1.5 per cent in 2003 and for 2004 is forecast to grow 3.5 per cent, the Economic Commission for Latin America and the Caribbean (ECLAC) stated today.  This is an improvement over 2002, when gross domestic product (GDP) fell 0.4 per cent.

The improvement in the region's economic performance is associated with international economic trends, particularly recovery in the United States, Japan and growth in China.  For the first time since 1997, there are no projections of negative growth for any Latin American economy next year.

This year Argentina posted a marked recovery of 7.3 per cent, after plunging 10.8 per cent in 2002.  Chile, Costa Rica, Colombia and Peru posted growth rates of over 3 per cent, although Brazil managed barely positive growth (0.1 per cent) and Mexico grew 1.2 per cent.  In Venezuela growth fell 9.5 per cent after a similar plunge in 2002, while the region's other economies posted weak performances, hovering around 2per cent.

In any case, the recovery is not enough to turn around the stagnation of recent years and per capita output is 1.5 per cent lower than it was in 1997.  After six years of negative per capita growth and sluggish labour markets, 44.4 per cent of the population (227 million people) live under the poverty line. Improved economic activity drove a slight rise in the employment rate, but unemployment remains high (10.7per cent).

In its report, Preliminary Overview of the Economies of Latin America and the Caribbean 2003, ECLAC notes that the terms of trade rose (1.3 per cent), halting the drop that occurred from 1998 to 2002 (3.3per cent).  Prices for the region's commodities rose 15.9 per cent, although the index for total export prices, including manufactured goods, rose less (2.8 per cent).  The oil price soared by 23 per cent.  Soy, copper and gold prices also rose significantly.

In Central America, the Andean Community and Chile, sales abroad rose by

5 per cent, and in the Southern Common Market (MERCOSUR) by 17.9 per cent.  Trade within the region also partially recovered.  This performance contrasts with the sluggish performance from Mexico's non-oil exports.  The combination of higher volumes and prices turned 2003 into a record year for the trade surplus ($41 billion).

For the first time in 50 years, Latin America's current account posted a surplus in 2003, of $6 billion.  The lack of external saving and relatively low domestic saving rates limited long-term growth and investment.  Gross capital formation remained virtually unchanged, 12.5 per cent lower than five years ago.  A recovery in investment and saving is key to achieving greater growth, but the region's countries save less than emerging economies elsewhere in the world.

Capital flows did not perform negatively, as they did in 2002.  The cost of external financing for the region returned to levels prior to the Asian crisis. Brazil, Chile, Colombia, Mexico and Peru were the main beneficiaries.  In 2003, the region's countries had access to market financing costs that on average were 300 basis points lower than 12 months ago.  The region's sovereign issues are recovering and financial outflows have stopped.  However, in the past five years, 4.6 per cent of the region's GDP was transferred abroad.

The ECLAC study indicates that foreign direct investment flows fell again, to reach $29 billion, much lower than the 1990-2002 average of $38 billion and down 25 per cent from 2002.  The importance of migrants' remittances also stands out, at $33 billion, representing a significant contribution to foreign resources in Mexico and Central America.  Finally, the region received compensatory funds worth about $22 billion, almost half of which came from the International Monetary Fund (IMF).  Reserves accumulated during the year reached $32 billion.

A significant development according to ECLAC is the stronger domestic performance achieved by countries after three years of turbulence: most are emerging with well controlled monetary and fiscal policies, along with more competitive exchange rates.  Economies that were dealing with profound crises, such as Argentina and Brazil, are well on their way to recovery.

After some tendency to rise last year, inflation dropped in 2003 and most countries posted single digit inflation on average (8.5 per cent), although real wages fell.  As the threat of inflation faded, central banks reduced interest rates during the second half of the year.

The regional trend toward flexible exchange rates continued, except in Venezuela.  In the Southern Cone countries, the exchange rate appreciated against the dollar, partly turning around the devaluation that took place in 2002.  In contrast, in Central America, Mexico and the Caribbean, exchange rate appreciation tended to stop and reverse.  Today, the real exchange rate in Latin America and the Caribbean is 18 per cent higher than the average for the past five years.

Projections for 2004

ECLAC considers the prospects for the next year favourable, provided the external scenario remains positive.  Growth estimates during the fourth quarter of 2003 point to stronger economic activity than the same period in 2002 and suggest growth will average 3.5 per cent next year.

In this sense, the United States economy should continue to perform well despite structural imbalances in its current account and fiscal accounts; the Asian economies should continue to grow, strengthening demand for Latin American exports; and the recovery in commodity prices should hold. 

In terms of internal factors, inflation is expected to remain low, real wages should improve somewhat and stimulate demand, and employment should respond well to recovered growth.

ECLAC estimates that next year Argentina will grow 4.5 per cent, Brazil will grow more than this year, at about 3.3 per cent, driven by a recovery in domestic demand, falling domestic interest rates, and recovered manufacturing activity, while Mexico should grow 2.8 per cent.

A summary of the report, the power point presentation prepared by the Executive Secretary, José Luis Machinea, and a press release will be available on 17 December on our websites:  www.eclac.cl, or www.eclac.org, from 15:00 hours GMT (12 noon in Chile), in Spanish and English.

U Radio stations can use segments of the United Nations Radio interview with the Executive Secretary available at: www.un.org/spanish/news/audiovis/radio/latest.htm.

For any questions, please contact Ximena Sánchez, with ECLAC's Economic Development Division, Tel.: (56-2) 210 2540/2246, or e-mail: xsanchez@eclac.cl

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