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Storm before the calm? IMF downgrades Latin America growth forecasts

The International Monetary Fund (IMF) lowered its growth forecasts for Latin America and the Caribbean (LAC) on Wednesday, predicting a continued recession in the region in 2016 as the wider global recovery continues to "struggle to gain its footing."

In the IMF's latest Regional Economic Outlook for the Western Hemisphere report published on Wednesday, the Fund predicted the region was set to see gross domestic product (GDP) contract by 0.5 percent in 2016, "marking two consecutive years of negative growth for the first time since the Latin American debt crisis of 1982–83," it said. Last year, the LAC economy contracted by 0.1 percent, the IMF said.

Paulo Fridman | Discovery Channel Images | Getty Images

However, the IMF noted that the negative growth rate predicted for this year masked "the fact that many countries continue to grow, modestly but surely, whereas a small number of economies — representing about half of the region's economy — face recession largely as a result of domestic factors." It also predicted that Latin America and Caribbean GDP would expand 1.5 percent in 2017.

The widespread current deceleration in activity reflected, "weak external demand, further declines in commodity prices, volatile financial conditions, and for some important domestic imbalances and rigidities," the report said. "At the same time, many countries have continued to experience large exchange rate depreciations, mainly as a result of deteriorating terms of trade and external demand," it added.

It also warned that the regional outlook was "particularly vulnerable" to various downside risks with further declines in commodity prices and a stronger-than-expected slowdown in China - the destination for 15 percent to 25 percent of exports from Brazil, Chile, Peru, Uruguay and Venezuela – the main concerns.

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High and low points

The IMF highlighted Brazil, until recently an emerging economic powerhouse now fraught with political scandal and due to host the Olympics this summer, as among Latin America's worst-performing economies.

"Brazil is mired in a deep recession with growth contracting by 3.8 percent—the same rate as in 2015—due to economic and political problems," it said. Likewise, the Fund predicted that Argentina and Venezuela also face output contractions of about 1 percent and 8 percent respectively in 2016.

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Bright spots in Latin America included Chile, although growth there was expected to slow to 1.5 percent in 2016, reflecting subdued confidence and sluggish investment in the mining sector. Meanwhile, Peru's economy had "strengthened," the IMF said, and growth was expected to rise further in 2016—to 3.75 percent, primarily boosted by ongoing mining investment.

Given a continued recovery in the U.S., the IMF said that the growth outlook for Mexico and Central America was "relatively robust." Mexico is expected to grow at a moderate 2.4 percent in 2016 and output growth for Central America is projected at 4.25 percent in 2016.

Outlook not so bright

The IMF did not offer much consolation looking at growth prospects over the next five years, saying these would "likely remain subdued," particularly for countries facing lower commodity prices and weak investment.

"Growth in Latin America and the Caribbean is expected to remain below historical trends for the foreseeable future," the IMF concluded, due to "inadequate infrastructure networks, shortcoming in quality education, and relatively low export diversity, in addition to lower commodity prices. Structural policies aimed at resolving some of these bottlenecks could help raise potential output."

Enacting structural policies and economic reforms are actions easier said than done in some Latin American countries with more pressing concerns like Venezuela – dealing with a major drought and energy crisis - and Brazil, where a political scandal has engulfed President Dilma Rouseff.

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The Fund recognized too that "where further accommodation might be warranted, macroeconomic policy space is limited. In particular, fiscal space is constrained by high debt, slower growth, and lower commodity revenues."

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