Macroeconomic outlook

Latin America is currently experiencing a slowdown in growth due to the downturn in external demand and the structural limitations of its economies. Although the slowdown is only moderate for the moment, there are reasons to believe that it could be persistent if there is no policy action to raise the growth capacity of the region’s economies. Given this scenario, this chapter analyses three important aspects and discusses suitable policies for reducing the associated vulnerabilities. First, it documents the changes in the external context and their consequences for the dynamics of external demand, considering some of the vulnerabilities resulting from the pattern of trade specialisation in the region and the limited ability of domestic demand to sustain growth. It also analyses the potential risks to financial and economic stability in the region’s financial systems amid the high uncertainty regarding the future direction of US monetary policy and liquidity in international capital markets. Finally, the chapter looks at how fiscal policy and the fiscal space are being changed. Institutions and regulations that can facilitate the sustainable creation of fiscal space are particularly important for the Latin American economies. Governments must do more than merely increase their revenue they must also invest more efficiently and effectively to respond to new needs and demands.