Another Difficult Year for the South American Economy

Around the world, emerging markets have fallen on hard times in recent years, with growth rates falling sharply during this period.  Nowhere is this trend more evident than in South America, where a number of factors have combined to lead to a dramatic deterioration of the region’s economic performance.  As the region is dominated by Brazil, it has been that country’s severe economic downturn that has been the primary catalyst of the wider region’s economic struggles.  Meanwhile, Venezuela’s full-blown economic collapse and Argentina’s recent difficulties have also contributed to the problems facing South America.  In fact, a wide range of internal and external factors have led to South America becoming the world’s worst performing region in terms of economic growth over the past year, a trend that is forecast to continue over the remainder of 2016.

South America’s economic downturn really took hold in 2015, although economic growth rates in the region have been trending downwards since 2010, when they peaked at 7%, a time when many South American countries envisioned long-term growth rates along the lines of those of Asia’s most successful emerging markets.  However, factors such as a lack of export competitiveness, low productivity levels, weak manufacturing sectors and a downturn in external demand for South American commodities all have contributed to a major slowdown in growth in the region.  In fact, it appears that the overall South American economy contracted in 2015 by as much as 2%, led by deep recessions in Brazil and Venezuela.  Moreover, the outlook for the region in 2016 is little better, with the South American economy forecast to shrink by another 0.8% this year, while longer-term growth rates are forecast to be well below previous levels.

The heart of the problem in South America remains Brazil, where a once-soaring economy has crashed to earth in recent years and is now in the midst of a severe recession.  After peaking at 7.6% in 2010, economic growth rates in Brazil averaged just 2.1% between 2011 and 2014.  However, much worse was to come as the Brazilian economy fell into a deep recession, resulting in a contraction of nearly 4% in 2015.  This severe downturn is the result of Brazil’s failure to improve its economic competitiveness in order to develop more diversified export-oriented industries, as well as the severe loss of investor, business and consumer confidence in Brazil.  Moreover, the government of President Dilma Rousseff has been beset by massive corruption scandals, costing it much of its support and weakening its ability to tackle Brazil’s most pressing economic problems.  As a result, Brazil is no longer dreaming of achieving China-like rates of economic growth, but rather is hoping that it can pull out of its deep recession by 2017 as confidence in Brazil’s future has collapsed.

Outside of Brazil, all other South American countries have experienced a decline in economic growth rates in recent years.  The worst performing economy in the region is found in Venezuela, where the complete mismanagement of that country’s once-flourishing economy has led to an economic collapse that has resulted in Venezuela’s economic output falling precipitously over the past two years.  In Argentina, the mismanagement of that country’s economy has also led to a complete halt to economic growth and is forcing that country’s new government to enact major reforms in order to revive the Argentine economy.  Elsewhere, the economies of the western half of South America that had performed extremely well in recent years have been hit hard by the economic slowdown in China that has led to sharp falls in commodity prices and has slowed to flow of foreign investment into countries such as Chile, Colombia and Peru.  With commodity prices forecast to remain low, and with the region suffering from an overall lack of economic diversification, the longer-term outlook for the South American economy is poor, with growth rates forecast to remain relatively low over the remainder of this decade.