The IMF has sharply marked down its forecast for world growth and it now expects a mild recession in the euro area. Naturally, weaker world growth will affect economic activity in Latin America and the Caribbean. Concretely, the Fund expects the world economy to grow by just 3¼ percent in 2012, ¾ percentage points lower than our September forecasts. In contrast, our forecast for the U.S. economy for 2012 is unchanged, as incoming data signal a stronger—but still sluggish—domestic recovery that will offset a weaker global environment. Commodity prices will be affected by ebbing global demand, with oil projected to fall about 5 percent and non-oil commodities about 14 percent.
A few days after the first sunrise of 2012 kissed the shores of Latin America, it is natural to ask: What does the New Year hold for the region’s economies, especially with Europe still under stress? For sure, a dimmer economic environment, here and abroad. Growth has softened in the larger countries of the region. Looking North, the United States is growing a bit more, but elsewhere activity is softening, including in China—an increasingly important customer for the region’s commodities. Perhaps more importantly, global financial markets are still strained, because many questions about advanced economies remain unanswered. What should countries do in the face of this risky outlook? A lot depends on their current macroeconomic situation.
As a commodity exporting region, Latin America has greatly benefited from the commodity price boom of the past decade. But with talk of a new global recession, what will happen to the region if the boom turns to bust? The IMF’s October 2011 Regional Economic Outlook: Western Hemisphere sheds light on Latin America’s reliance on commodities from a historical perspective. Our study also looks at the effect of a sharp decline in commodity prices on emerging market economies and on the policies that could shield countries from that shock.
It wasn’t all that long ago when virtually all of sub-Saharan Africa’s exports were destined for Europe and North America. But the winds of Africa’s trade have shifted over the past decade. There has been a massive reorientation towards other developing countries, in particular China and India. Like Janus, the Roman god, Africa’s trade is now, as it were, facing both east and west. Our latest Regional Economic Outlook for sub-Saharan Africa looks closely at these developments and its policy implications. In addition to the well-known gains from international trade, Africa’s trade reorientation is also beneficial because it has broadened the region’s export base and linked Africa more strongly to rapidly growing parts of the global economy. These changes will help reduce the volatility of exports and improve prospects for robust economic growth in Africa.
As the European crisis lingers and advanced economies stall, the next six to eighteen months will be challenging for Latin America. Increased global uncertainties may create headwinds for the region—greater stress in the global economy and markets—tailwinds, if the advanced countries’ problems are tackled and economies spring back to life, or volatile gusts—weak growth and continued uncertainty—like we are seeing now. But it’s not easy to forecast the future of Latin America in these uncertain times, as we discuss in our just-published Regional Economic Outlook for Western Hemisphere. (Here I focus on Latin America, but our report covers the whole region, including North America, Central America, and the Caribbean.)
The IMF chief gave a speech in New York City today that sets out how the IMF can help countries tackle this troika of challenges to the global economy.
Nemat Shafik, who took over as IMF Deputy Managing Director in April, says she has been surprised by the vigor of internal policy debate at the IMF. “From the outside looking in, you have the impression that the IMF is a monolith with a very single-minded view of the world. When you are inside the Fund, what is really striking is how active the internal debate is,” she says. At a time when the global economy is being buffeted by continued uncertainty in Europe, uprisings in the Middle East, and signs of overheating in some emerging market economies, there’s a lot to discuss. And, it addition to global economic problems, the IMF’s work environment has come under increased scrutiny, in particular how women are treated and its professional code of conduct. In an interview, Ms. Shafik discusses some of these issues.
Asia’s vigorous pace of growth has seen the region play a leading role in the global recovery. But there are signs that higher commodity prices are spilling over to a more generalized increase in inflation. Expectations of future inflation have picked up. And accommodative macroeconomic policy stances, coupled with limited slack in some economies, have added to inflation pressures. Against this backdrop, the need for policy tightening in Asia has become more pressing than it was six months ago, especially in economies that face generalized inflation pressures. How should policymakers address these challenges?
For decades, countries in the Middle East and North Africa have relied heavily on food and fuel price subsidies as a form of social protection. And, understandably, governments have recently raised subsidies in response to hikes in global commodity prices and regional political developments. Like many things, there may be a time and a place for using subsidies. But, they need to be better targeted. And, often, there will be better alternatives. Alternatives that do a better job of protecting the poor. Subsidies enjoyed by all are typically poorly targeted, so they are not the most cost-effective way to provide social protection. They really should be regarded as stop-gap measures. But, better targeting subsidies or replacing them with more effective social safety nets is a complex process, so buy-in from the public is crucial to success.
Medium-term economic growth prospects in the Caucasus and Central Asia region are strong. But, to secure ongoing prosperity, the eight countries of the region—Armenia, Azerbaijan, Georgia, Kazakhstan, the Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan—will need to look beyond traditional sources of growth. The challenge for policymakers will be to foster new and more diverse growth drivers, outside mining, oil, and gas. There are seven policy pillars that can help them do that, including strengthening economic and financial ties within the region.