Dark Days for the Latin American Economy

Just a few years ago, much of Latin America was in the midst of an economic boom and many economists were predicting that the region was on the brink of a long period of sustained high rates of economic growth.  In fact, most of Latin America’s leading economies were able to quickly rebound from 2008-2009’s global financial crisis to record extremely high rates of economic growth in 2010 and 2011.  This led to predictions that many of Latin America’s largest economies, most notably Brazil, were on the verge of emulating the sort of growth rates seen in fast-growing emerging markets such as China.  With abundant natural resources and rapidly rising levels of purchasing power, it appeared that bright days were ahead for the Latin American economy.

Unfortunately for most Latin American economies, things did not turn out as well as had been hoped for in the heady days of 2010 and 2011.  Instead, nearly all of the region’s leading economies have seen growth rates progressively slow in recent years to the point where the region’s total economic growth rate was just 1.3% in 2014.  Moreover, this downturn has accelerated this year, and we are now forecasting that the total Latin American economy will contract by 0.4% this year and will record growth of just 0.7% next year.  In fact, growth rates of more than 3.0% per year are not forecast to return to Latin America at any time over the next three years, an indictment of the region’s poor economic situation.

There are two main reasons why Latin America was unable to sustain the high rates economic growth recorded earlier this decade.  First, too many of the region’s leading economies have been grossly mismanaged by their government and business leaders.  This is most evidenced in the gross mismanagement and rampant corruption that has led to deep recessions in Brazil and Venezuela this year, two countries with vast natural resources.  The other main factor in Latin America’s recent economic struggles has been the sharp fall in natural resource and agricultural prices over the past two years, stemming from the fall in demand in China and other key export markets.  Here, many of Latin America’s leading economies were exposed as lacking the diversification needed to withstand such external shocks, a fact that stems from the relative lack of foreign investment in all but a couple Latin American economies. 

Unfortunately, Latin America’s most disappointing economies are also the region’s largest economies.  For example, the Brazilian economy is forecast to shrink by 3.0% this year and by another 1.0% in 2016.  This is due in large part to the dramatic decline in business, consumer and investment confidence in scandal-ridden Brazil, as well as in the country’s low level of economic competiveness.  The region’s second-largest economy, Mexico, has also disappointed in recent years, despite the fact that Mexico has unique access to the massive North American market.  Two other large Latin American economies that have struggled mightily in recent years are Argentina and Venezuela, with the former on the brink of a recession and the latter suffering from hyper-inflation and a recession that could result in as much as a 10% contraction of the Venezuelan economy this year alone.

When assessing the economic outlook for Latin America in the coming years, it is hard to find a basis for optimism, as commodity prices are likely to remain low over the near-term and the region will continue to struggle to diversify its economy away from its dependence upon commodity exports.  One factor that could boost optimism in Latin America is the potential for government change, as many of the region’s most inept and corrupt governments (such as in Venezuela, Argentina and Brazil) have lost much of their support and face the prospects of losing power unless they take the steps needed to boost economic growth and reduce corruption.  Nevertheless, without the expansion of the region’s manufacturing and service sectors, and without a major increase in the region’s economic competitiveness, Latin America will continue to struggle economically for the foreseeable future.