1. The external situation
As of late 2008, it is not yet possible to arrive at an accurate projection of the impact that the financial crisis will have on the real sector of the economy. With uncertainties spreading worldwide, the balance sheets of financial bodies are weakening owing not only to the loss of value of mortgage guarantees but also, more generally, to the impact of the recession and the severe shortage of liquidity. The uncertainties also extend to the prospects for other major financial-market components such as insurance companies, hedge funds and pension funds, some of which have already been the object of rescue operations.
The recessionary trend is gradually worsening as a result of huge losses of financial and non-financial wealth in the private sector, most of all in the developed countries but also in emerging economies, and the steep fall in credit. The downward trend is also damaging expectations and causing sharp declines in investment and consumption.
As at the fourth quarter of 2008, there are signs that levels of activity and other real variables in the world’s principal economies have been weakening considerably, thereby creating a negative feedback loop in financial markets. Macroeconomic aggregates in the United States indicate that, even though levels of economic activity did not worsen initially, growth in the first months of 2008 reflected a combination of a sharp drop in the aggregate formed by consumer durables and residential investment (-6.1%) with a strong upturn in goods and services exports (10.5%), which were stimulated by the real depreciation of the dollar up to mid-2008. This signals a progressive weakening of the domestic market which grew worse towards the end of the year.
The labour market, especially labour demand, has been very sensitive to the effects of the crisis. While in 2006-2007 new jobs created each month averaged about 133,000, between December 2007 and November 2008 nearly 170,000 jobs were lost per month; this trend worsened as the year went by, bringing the unemployment rate to 6.7% in November, its highest level since the early 1990s.
In the other developed economies, not only did the new set of conditions lead to a sharper initial slowdown than in the United States, but the financial problems were passed through to economic activity more rapidly. GDP growth rates in Japan and the euro zone amounted to a meagre 0.7% and 1.4%, respectively, in the first nine months of 2008, compared to 2.0% and 2.6% in 2007. Both recorded a GDP contraction in the second and third quarters of 2008, a clear sign that these economies had moved into recession. This was associated, first, with a downturn in export performance —as a result of real dollar depreciation in the first stage of the crisis, as noted earlier— and weakening capital formation. In a number of countries, such as Japan and Germany, the stretch of export expansion from 2003 onwards had driven a surge of investment in machinery and equipment, which lost momentum in the new conditions. In other countries, such as Ireland and Spain, rising investment in construction was associated with the real estate price boom, which began to be reversed as conditions toughened in the credit market.
The depth and duration of the recession will depend on the effectiveness of steps taken to stimulate demand and offset the slump in private spending, as well as on the normalization of credit markets. It is to be hoped that the array of measures implemented by the United States Federal Reserve and other central banks will be enough to contain systemic risk and that, in conjunction with the recovery of their financial systems and the initiatives launched from fiscal areas, the developed economies will gradually begin to rebound in the second half of 2009. This is the scenario on which the growth projections for the region for 2009 are based.
2. Expected performance of the Latin American and Caribbean economies in 2009
As noted earlier, although the Latin American and Caribbean region is better prepared to face this crisis than previous ones, there are a number of channels through which the economies are likely to be affected.
First, the real channel —the global slowdown— has a number of aspects that do not affect all the countries the same way. Thus, the impact of financial contagion will depend on various factors and the countries of the region are exposed to it in varying degrees.
Growth of 1.9% is projected for the region in 2009. This estimate is built on a scenario in which the worst of the crisis has passed by the second half of 2009 and in which the global economy in general and the region in particular gradually begin to strengthen. This forecast is based on a comparison of average levels for 2008 and 2009 which points to a sharp slowdown and largely reflects a statistical effect. A more pessimistic scenario of continuing and even deepening recession and tight credit conditions cannot be ruled out, however. In this case, obviously, the problems discussed here would worsen and the growth rate could be nil or even negative.
A breakdown by subregion shows smaller differences than those seen in earlier years. Although they all show a strong slowdown, Mexico and Central America continue to post lower growth than South America, and a very sharp downturn is projected in the growth rates of the Caribbean economies.
3. Global and regional problems call for a concerted solution
Apart from the efforts of the region’s countries to deal with the crisis and to do as much as possible to contain its impact on their economies and societies, the situation worldwide calls for coordinated solutions to give maximum leverage to whatever strategies are put in place.
In the last few years the global economy has expanded within the framework of excessive consumption in the developed countries, which has been financed by excess saving in the emerging economies. The surplus saving has largely been a result of the emerging economies’ efforts to shield themselves from the impact of a potential financial crisis by building up assets. This form of “self-insurance” was an inefficient yet effective means by which many emerging economies could deal with a situation in which they found the resources and instruments made available by international financial institutions were unsatisfactory. This form of behaviour became more marked in the aftermath of the Asian crisis of 1997.
Clearly, the picture has changed substantially in the last year and half. The combination of wealth loss, credit crunch and rising unemployment will depress consumption in the developed economies and darken their performance expectations, feeding the downward spiral. So, in the near future, it will be up to the emerging economies to produce much of the demand needed to compensate for the negative stimuli in terms of world growth coming from the developed world. In this situation, self-insurance strategies are not only insufficient but are actually counterproductive, since they can do nothing to restart global growth. These strategies originated in real failures, however, which must be borne in mind in the design of a new international financial architecture. It is therefore essential that the emerging economies are involved in planning that architecture.
It the light of this, it is obvious that the role of the emerging economies in global economic growth has not only grown in importance, but is likely to increase further. They must therefore be included in forums to discuss strategies for coordinating policies to stimulate global growth and be provided, through international bodies, with the resources to finance the implementation of countercyclical policies.
The need to coordinate policies and resources also has a regional dimension. Macroeconomic policy coordination at the regional level and the strengthening of intraregional trade and integration in the broadest sense offer opportunities to leverage the impacts of the strategies being implemented and to counteract the conditions of low GDP and world trade growth that lie ahead.
Intraregional trade incorporates a higher level of innovation and knowledge, and it can therefore be expected to have a stronger impact on the productive fabric. It is also a form of trade in which small and medium-sized enterprises participate more actively, and it therefore offers greater potential in terms of job creation and, hence, in terms of increased equity. This type of trade is also markedly procyclical, however, and a financial support strategy will therefore be required. This, in turn, means that regional financial institutions will have an important role to play as providers of liquidity to finance these efforts.