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ECONOMY | 28-05-2019 10:42

Lost decade spectre haunts Latin America as big economies falter

Latin America – hit by simultaneous contractions in Argentina, Brazil and Mexico – has expanded only 0.7% a year on average during the past few years – barely enough to keep up with population growth.

Latin America is on the verge of suffering another lost decade.

The region, still struggling to cope with the end of the commodities boom, has expanded only 0.7 percent a year on average during the past few years. That’s hardly enough to keep up with population growth, meaning that people are poorer today than they were in 2012, according to the International Monetary Fund. Now its biggest economies – Brazil, Mexico and Argentina – have contracted simultaneously for the second time in just over three years, causing yet another headache for policy makers.

So what’s behind the rot? More immediate concerns include trade tensions abroad and rising political uncertainty at home. But it’s the structural weaknesses that were left unfixed when agricultural, energy and metals prices soared over the past decade – be it an an inefficient state-owned oil company in Mexico or unsustainable social security spending in Brazil – that could end up shackling the region for years to come.

“Latin America wasted a lot of opportunities,” said Adriana Dupita, Bloomberg’s Latin America economist. “Now they’ll have to work much harder and in adverse conditions.”

The economic fiasco is putting pressure on central banks to act, though there’s only so much they can do. Many expect Brazil to ease monetary policy, but only after the government succeeds in overhauling the pension system. In Mexico, inflation above the target range is preventing policy makers from lowering borrowing costs, currently at a decade high.

Granted, nobody is saying the current malaise will be anywhere as severe the economic calamity of the 1980s, when over a dozen countries defaulted on their debts. Nevertheless, there are worrying signs just about everywhere you look.

Brazil’s economy shrank between January and March, a key central bank activity index showed May 15, and if the trend is confirmed with the release of gross domestic product data on Thursday, it will be the country’s first quarterly contraction since 2016. For all of 2019, forecasters see Latin America’s largest economy expanding little more than one percent, its third year of such tepid growth. What’s more, Brazilians’ average income plunged 8% during the last recession and have since stagnated, according to a May 17 report by Affonso Celso Pastore, a former central bank president.

“We can only describe this situation as characteristic of a depression,” he said.

Things aren’t that much better in Mexico. There, growth shrank in the first three months of the year as oil output and demand for services dropped and the government contained spending. Bank of America, one of the most pessimistic firms on Mexico, now sees just 1% growth this year. The US-Mexico-Canada trade deal failing to win approval, erosion of confidence in the government and further declines in crude output are all risks.

Worse still is Argentina. The economy shrank 6.8 percent in March, the 11th straight year-on-year monthly decline. The country has been in and out of recessions since 2012, but this downturn has proven to be the longest. Argentines have yet to see the policies of market-friendly President Mauricio Macri bear fruit, prompting him to institute some price controls as inflation runs above 50 percent.

Smaller countries across Latin America haven’t been immune either. Chile, the region’s poster child for sound economic management, saw its economy stagnate. Peru posted its lowest quarter of growth since 2017. Both economies, which rely heavily on their mining industries, were hurt by the US-China trade war. And, of course, there’s Venezuela, whose economic collapse is one of the worst ever seen outside wartime.

With the three biggest economies making up about two-thirds of the region’s output, it’s no surprise growth in Latin America has lagged behind the developing world average for two decades.

“Growth has been sluggish now for a number of years in the region and the outlook for the region and for commodity prices is clearly not fantastic,” said Shelly Shetty, senior director for Latin America at Fitch Ratings.

Political uncertainty

n Brazil and Mexico, dimming growth prospects, high unemployment and dissatisfaction with the status quo have led to the rise of anti-establishment governments (albeit on opposite ends of the political spectrum). Similar frustrations have also prompted Argentines to wax nostalgic for the former president Cristina Fernández de Kirchner, who’s seeking the vice-presidency on the opposition ticket.

However, prospects of a quick revival under the new governments of Brazil and Mexico have quickly faded, throwing their outlooks even further into doubt. Economists have been slashing growth forecasts for both.

“The fact that the demographic dividend in the region is also going to dwindle only highlights the need for policy makers and governments to focus on reforms to boost competitiveness,” Fitch’s Shetty said.

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