×

Latin America confidence, domestic demand remain weak, warns IMF

Paulo Fridman | Discovery Channel Images | Getty Images

The recovery among several Latin American economies is expected to continue into 2018, according to the latest note from the International Monetary Fund (IMF), but low confidence in the region and weak domestic demand are predicted to drag on growth.

"After disappointing growth in the past few years, economic activity in Latin America remains on track to recover gradually in 2017–18 as recessions in a few countries—notably Argentina and Brazil—are coming to an end," the Fund noted in a blog post entitled "Latest Outlook for The Americas: Back on Cruise Control, But Stuck in Low Gear," published on Tuesday.

"But amid low confidence, domestic demand continues to remain weak across most economies, and is expected to only recover slowly as actual output catches up to potential and internal sources of growth build strength, based on a decline in political and policy uncertainty across some major economies," the note, authored by the IMF's Director for the Western Hemisphere Department, Alejandro Werner, said.

The IMF's latest projections show the region growing by 1 percent in 2017 and 1.9 percent in 2018. The gradual recovery follows a gloomy period for Latin America's largely commodity-driven export economies which have suffered as a result of a decline in commodity prices over the last few years.

In addition, high inflation, currency depreciation and lower domestic demand – as well as wider political upheavals and unfavorable weather conditions such as El Nino – have also contributed to weaker economic conditions in the region.

There are signs of improvement, however, with regional central banks now cutting interest rates in a bid to boost spending and growth. Major regional economy Brazil saw positive growth in the first quarter of 2017 after contracting for eight consecutive quarters while better weather conditions had led to a strong harvest in Argentina, Brazil, Paraguay, and Uruguay.

The IMF noted that accommodative monetary policy in Bolivia meant that growth was holding up well and the near-term recovery was also expected to continue in Chile and Colombia.

Weaker growth prospects

Despite the gradual recovery predicted for Latin America, the IMF's Werner explained that prospects for strong long-term growth in Latin America "look dimmer now than they did a few years ago at the height of the commodity price boom."

Over the medium term, the IMF projected Latin America to grow approximately 1.6 percent in per capita terms, noting that this is identical to the region's performance over the past quarter century. In addition, it cautioned that this figure was also well below the rates observed for the group of emerging and developing economies (2.6 percent) and vastly below the growth rates in China (9 percent).

As such, Werner said some countries in the region "will need clear strategies to adjust further following a permanent loss in commodity revenues." He recommended that Latin American countries pursue structural reforms including improving education and infrastructure, tackling corruption and promoting investment in order to boost growth.

"A central challenge Latin America and the Caribbean will face going forward is to preserve (and build upon) the success achieved in recent years in improving living standards," Werner said.

"With medium-term growth projected to remain modest and fiscal space increasingly scarce, countries need to pursue much needed structural reforms with a greater sense of urgency to achieve this goal."

Follow CNBC International on Twitter and Facebook.