Overview: After a sharp recovery from the global economic crisis in 2010, when regional output expanded by 6 percent, growth in the Latin America and the Caribbean decelerated markedly, to an estimated 3 percent by 2012. Supply side constraints have become apparent in some of the larger economies, where output was near or above potential during the recovery phase, and which contributed to relatively high inflation and deterioration of current account balances. Despite a sharp deceleration in growth, regional output is only now in line with potential GDP. Cyclical factors such as lower commodity prices and generally subdued global activity, in particular in high-income countries, have also weighed on growth. Private consumption remained relatively robust, while the contribution to growth from investment and exports weakened considerably.

Outlook for 2013-2015: The factors that have contributed to the deceleration in growth in the post-recovery period will continue to weigh on economic activity over the short-to-medium term. Growth in the region is expected to accelerate only modestly to 3.3 percent in 2013, and to about 3.9 percent over the medium terms. Growth is expected to firm somewhat from a very weak pace in Brazil and Argentina, while slowing down in most of the commodity exporters, largely on account of weaker commodity prices. Growth in Venezuela is expected to decelerate markedly as highly expansionary policies are reversed. Meanwhile Paraguay will see one of the sharpest accelerations in growth this year, on account of normalization in agriculture output. Growth in Central America will benefit over the medium term from firmer growth in the United States and improvements in terms of trade. Growth in the Caribbean will be held back by large fiscal adjustments necessary to bring fiscal deficits to sustainable levels and help reduce public debt burdens.

Risks and vulnerabilities: The severe downside risks to the global economy have eased significantly compared to last year, reflecting progress in Euro-area economies towards reducing fiscal and banking solvency risks and an easing in fiscal-cliff related risks in the United States. However, little progress has been made in setting the US fiscal policy on a sustainable path and by Japan to reduce its large general government debt to sustainable levels, and these continue to represent sources of risk for the global economy.

For the Latin America and the Caribbean the risks stem in part from the challenges of finding the optimal balance between macroeconomic policies to stimulate domestic demand in the short term and structural reforms to enable faster growth over the longer run. In addition ample global liquidity and higher and more volatile capital flows are complicating the task of conducting monetary policy and could, if interest rates are low, lead to rapid credit expansion and goods and asset price inflation. For commodity exporters, large fluctuations of export prices represent a major risk to the outlook.

Over the longer term as external financial conditions are likely to become tighter, higher financing costs could result in reduced investment spending and growth in the countries in the region and may also expose unsustainable positions. If greater progress is made to implement a wide range of structural reforms and address supply-side constraints to growth, economic expansion over the medium term could be more robust.

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