Report on the Latin American economy : second half of 2017

Abstract

Latin America is now participating in the cyclical improvement in global activity. The weighted average growth rate of GDP in the region’s six main economies stood fairly close to estimated potential growth. Moreover, the results across the countries show a degree of convergence. Broadly, there has been a significant reduction in inflation rates which has enabled central banks – with the odd exception, such as Argentina and Mexico – to cut policy rates. To offer a deeper assessment of the monetary policy stance in the main economies with an inflation target, the Report includes a thematic section in which a Taylor rule is constructed on the basis of estimated natural interest rates. Furthermore, the Latin American economies have continued to adjust their external balances to a new scenario of low commodities prices, but fiscal adjustment has not progressed to the same extent. Nonetheless, the region’s financial markets have performed very favourably and currencies have tended to appreciate. The higher-frequency indicators show that the dynamism of activity has run into the second half of the year. Nonetheless, the continuity of the recovery in the region is subject to certain downside risks. Chief among these in the external environment is the possible tightening of financial conditions on international markets. Risks persist too in the case of possible changes in tack in US policies, principally towards greater trade protectionism in the context of the negotiation of the North American Free Trade Agreement, to which Mexico is a signatory. In this respect, the second thematic section of this report analyses the factors behind the recent strength of private consumption in Mexico, against a relatively unfavourable background. On the internal front in the region, where there is a very busy electoral calendar until late 2018, the risks appear to be more balanced