World Bank lowers growth forecast for Latin America once again

But figures are largely dependent on whether China manages to rebalance its own economy

Housing in Rio de Janeiro with Maracaná stadium in the background.
Housing in Rio de Janeiro with Maracaná stadium in the background.Getty

The year got off to a disappointing start. A harsh winter in the United States, geopolitical instability in Ukraine and growth moderation in China all colluded to lower growth forecasts for developing countries.

In its latest report, the World Bank estimates that economic growth in Latin America will be 1.9 percent, one point lower than the previous forecast issued six months ago.

The Global Economic Prospects report, which was released on Wednesday, uses the term “deficient” to describe first-quarter performance in Brazil, Mexico, Peru and Argentina.

Brazil, the continent’s largest economy, will grow a timid 1.5 percent this year, compared with 2.3 percent last year. This country is vulnerable to high inflation, falling demand and foreign deficit. Mexico’s problem is higher taxes, which will reduce economic growth to 2.3 percent of GDP. This is twice as high as in 2013 but practically half of what it was in 2012. Argentina will remain stationary after growing at a rate of three percent last year.

It is necessary to prevent mediocre growth from becoming the new normal”

Venezuela’s economy will also stagnate this year after growing a mere 1.3 percent in 2013. Peru, which grew a spectacular 5.8 percent last year, will come down to a more moderate four percent. A similar slowdown is expected in Panama, which will see economic growth rates drop from eight percent to 6.8 percent.

Only Colombia will move in the opposite direction and accelerate its growth rate of 4.3 percent last year to 4.6 percent in 2014.

The overarching message is that developing countries should brace for a year of poor growth. This means that for the third year in a row, the countries that drive the global economy will grow at a pace of less than five percent of GDP.

As World Bank president Jim Yong Kim says, this rate is “excessively modest.”

The World Bank chief feels that this pace is insufficient to create the level of jobs that is required to address the challenge of extreme poverty. He also laments the “slow advance” in structural changes. “Clearly, countries need to move faster and invest more in domestic structural reforms to get broad-based economic growth to levels needed to end extreme poverty in our generation,” he concluded.

The international organization is worried that Latin America might get accustomed to growing at rates of under three percent. Thus the insistence on encouraging domestic productivity as a way to sustain a solid growth pace. “It is necessary to prevent mediocre growth from becoming the new normal,” reads the report.

If the Asian economy sustains a sharp fall, the waves will be felt intensely on the other side of the Pacific

In the medium term, the outlook improves. Developing countries will grow 5.4 percent in 2015 and 5.5 percent in 2016. In Latin America, these forecasts are 2.9 percent in 2015 and 3.5 percent in 2016.

Broken down by countries, Brazil is expected to grow 2.7 percent in 2015 while Mexico will post 3.5 percent growth and Argentina’s economy will expand at a rate of 1.5 percent. For 2016, the forecast is three percent for Brazil, four percent for Mexico and close to three percent for Argentina.

Meanwhile, Peru will return to rapid growth of nearly six percent between 2015 and 2016, according to the World Bank projections. Panama will descend to 6.2 percent and is expected to consolidate at that level. Colombia will also presumably consolidate its growth rate over the next two years to settle at around 4.5 percent, above the regional average.

But as the World Bank and International Monetary Fund keep noting, these figures depend on China’s success at rebalancing its own economic growth. If the Asian economy sustains a sharp fall, the waves will be felt intensely by its trade partners on the other side of the Pacific.

The report concludes that mid-term growth in developing countries will come hand-in-hand with reforms aimed at strengthening domestic demand and depend less on outside financing.

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