‘Mild recession’ for the Caribbean from China, Europe fallout
A new Inter-American Development Bank says the Caribbean remains resilient to external shocks, despite economic challenges in China and Europe.
BRIDGETOWN, Barbados, Thursday March 22, 2012 - A possible slowdown in world economic growth could result from the deepening of the debt crisis in Europe and a deceleration in China, but Latin America and the Caribbean would remain resilient if that was the case.
This is according to the Inter-American Development Bank’s (IDB) 2012 Macroeconomic Report released during the Bank’s recent annual meeting.
The report outlines two major potential economic risks the region could face in the next year: a faster-than-expected deceleration of China’s economy and deepening economic problems in Europe. Using a global economic model, the study concludes that even if both of these two major events were to occur, Latin America and the Caribbean might suffer only a relatively mild recession.
The study presented to the IDB’s Board of Governors, “The World of Forking Paths,” offers a comprehensive analysis of potential risks affecting the region in the short and medium-term, providing an assessment of main macroeconomic vulnerabilities and strengths as well as policy recommendations.
“We are cautiously optimistic for Latin America and the Caribbean. The region has grown strongly in the last couple of years and it has shown it is resilient to shocks,” said Santiago Levy, vice president for sectors and knowledge for the IDB. “Most importantly, the region has developed a set of policy tools that have proven to be effective during economic downturns.”
The report notes that a number of countries, especially commodity exporters, have accumulated international reserves that would help cushion them from international financial turbulence and have reduced external liabilities. Breaking with the past, most countries were able to implement effective fiscal stimulus packages to smooth the last downturn, and have gained valuable experience in counter cyclical fiscal policymaking.
Most of the larger economies in the region have adopted flexible exchange rate regimes that make it easier for them to smooth fluctuations. And, several countries in recent years have implemented more sophisticated monetary policies and employed macro-prudential tools, such as the active use of Bank-liquidity requirements and measures to slow currency appreciation, which have all enhanced the region’s resilience against another possible international financial crisis.
“Even though current economic scenarios do not anticipate a major crisis in Europe or a strong slowdown in China, the world is quite uncertain right now -- it really is one of forking paths,” Andrew Powell, principal advisor in the IDB’s Research Department and the coordinator of the report, said. “Our report shows that resilience has increased for the region but certain vulnerabilities remain and may limit the scope for countercyclical policies if the crisis were to worsen in Europe.”
According to the report, Latin America and the Caribbean’s dependency on commodities remains high and a surge in capital inflows has increased private sector, foreign-currency portfolio liabilities. Moreover, the presence of a large number of European banks could make the region’s banking sector vulnerable to a credit squeeze.
Under the stress scenarios outlined in the study, the report reached following conclusion that the external accounts for Latin America and Caribbean remained resilient to external shocks and the region should continue to have access to external borrowing and to official sources if required.
However, one area of concern expressed was that most of the countries in the region have less room to implement a fiscal stimulus package today than in the wake of the 2008 Lehman crisis. In several countries that implemented fiscal stimulus packages in 2008, part of that increased spending appears to have become permanent. Out of a sample of 23 countries, only four have ample room for a countercyclical fiscal policy in the event of another international financial crisis. The IDB recommended that countries with limited fiscal space should design temporary measures in their stimulus packages that may be retired once the negative shock has dissipated.