Brazil and other key countries leading Latin America’s economic recovery

Given its rather inglorious economic history, one would have thought that the severe global recession of 2008/2009 would have been especially harsh and long-lasting in Latin America. But latest data from the International Monetary Fund (IMF) and various central banks in the area suggest otherwise. Of course, the crisis has had a negative impact on the area, but the IMF estimates that its recovery will "gather moderate speed" in the coming months. In fact, Latin America could be the first major region in the world to unwind its various stimulus packages.

So, what circumstances caused this unexpected development? The answer is twofold: a) overall good fiscal management in some key countries and b) Brazil. Latin America's biggest economy has had an outstanding economic performance under President Lula. After the economy stalled in Q4/2008 and Q1/2009, Brazil returned to a quarterly growth in Q2. Fiscal management is sound, inflation is under control and the country is poised to lead the region's recovery with an expected growth of +3.5% in 2010. In September Brazil added another 252,617 payroll jobs - its eighth consecutive month of job increases. One of the not-so-desirable consequences is a strengthening currency. Manufacturers complain bitterly about the strong real because it will make it harder to stay competitive in the global marketplace.

Other noteworthy contributors to Latin America's recovery are Chile, Colombia, Peru and Mexico. Chile's central bank cut interest rates more aggressively than any other bank (the basic lending rate went down to 0.5%) and could possibly be one of the first banks to increase rates next year should there be resurgent inflationary trends. Peru's economy came to standstill when the global recession hit, but it has since then staged a recovery and its GDP will end this year with an admirable growth of +1.5% and is expected to post an impressive +5.8% for 2010. Mexico, on the other hand, was hit harder than most other Latin American countries and will not recover as quickly because it is tied too firmly to the US economy.

Argentina, Bolivia, Ecuador and Paraguay will also grow more slowly because their economic bases are less solid and their finances are not quite as sound. Of the major economies in Latin America, Venezuela is the "odd man out." Venezuela's economy is expected to shrink -0.4% next year.

To be sure, the global economic crisis hit the region just as hard as it did elsewhere. Experts expect GDP in 2014 to be three percent less than it would have been without the crisis. This amounts to about US$150 billion, roughly the annual economic output of Chile. For the year, the region's combined GDP will fall -2.6% and 2010 will see a growth of +2.9%. This year, imports into Latin America will fall more drastically than exports. As the world recovers from the crisis, this trend will reverse next year. Strong capital inflow will cover the resulting gap and keep balance of payment risks contained.