Global economic activity strengthened in the second half of 2013 and is expected to pick up further in 2014, led by a faster recovery in the advanced economies. World output growth is projected to increase from 3 percent in 2013 to slightly above 3½ percent in 2014 and nearly 4 percent in 2015. Activity in the advanced economies will be driven by a reduction of fiscal headwinds, except in Japan, and still highly accommodative monetary conditions. Meanwhile, the momentum of growth in emerging market economies is likely to remain subdued, reflecting tighter financial conditions and homemade weaknesses in some cases. Risks around the outlook have diminished somewhat, but remain tilted to the downside, including because of more prominent geopolitical risks.
Against this backdrop, economic activity in Latin America and the Caribbean is expected to stay in low gear in 2014. The faster recovery in the United States and other advanced economies is expected to bolster export growth, but fl at or lower world commodity prices and rising global funding costs are set to weigh on domestic demand. Supply-side bottlenecks in several economies are likely to persist, amid a continued slowdown in investment. On balance, regional growth is projected at 2½ percent in 2014, down from 2¾ percent in 2013 and well below the relatively high growth rates of 2010–12. A modest pickup, to 3 percent, is projected for 2015.
More than usual, these headline numbers mask divergent dynamics across the larger economies of the region. Growth in Mexico is expected to rebound on the back of a stronger U.S. recovery and normalization of domestic factors. In Brazil, activity is expected to remain subdued, as weak business confidence continues to weigh on private investment. Argentina and Venezuela are facing a difficult growth outlook, linked tosignificant macroeconomic imbalances and distortionary policies. For the region at large, the outlook remains clouded by downside risks, including renewed bouts of financial market volatility and a sharper-than-expected decline in commodity prices. Weak fiscal positions represent an important domestic vulnerability in many economies, especially in Central America and the Caribbean.
• In the financially integrated economies, output is generally close to capacity, labor markets remain tight, and external current account deficits have widened. This constellation argues for a neutral fiscal stance, although countries with weaker public finances or large external deficits would be best served by some outright tightening. Monetary policy can respond flexibly to incoming data in economies where inflation is moderate.
However, in countries with persistent inflationary pressures, both fiscal and monetary policy should aim for
a tighter stance. Exchange rate flexibility should remain the principal absorber of external shocks.
• Policy priorities among the other commodity-exporting economies vary as a function of specifi c domestic conditions. In Argentina and Venezuela, fundamental adjustments are needed to restore macroeconomic stability and avoid disorderly dynamics. The other economies in this group face more positive growth prospects, but will also need to control levels of public spending, which have increased sharply over the past decade on the back of strong commodity revenue.
• In Central America, fiscal consolidation should not be delayed any further as borrowing conditions will
become less favorable. Consolidation efforts need to combine expenditure restraint and higher tax revenues.
The countries that are not officially dollarized would also benefit from greater exchange rate flexibility.
• In the financially integrated economies, output is generally close to capacity, labor markets remain tight, and external current account deficits have widened. This constellation argues for a neutral fiscal stance, although countries with weaker public finances or large external deficits would be best served by some outright tightening. Monetary policy can respond flexibly to incoming data in economies where inflation is moderate.
However, in countries with persistent inflationary pressures, both fiscal and monetary policy should aim for
a tighter stance. Exchange rate flexibility should remain the principal absorber of external shocks.
• Policy priorities among the other commodity-exporting economies vary as a function of specifi c domestic conditions. In Argentina and Venezuela, fundamental adjustments are needed to restore macroeconomic stability and avoid disorderly dynamics. The other economies in this group face more positive growth prospects, but will also need to control levels of public spending, which have increased sharply over the past decade on the back of strong commodity revenue.
• In Central America, fiscal consolidation should not be delayed any further as borrowing conditions will
become less favorable. Consolidation efforts need to combine expenditure restraint and higher tax revenues.
The countries that are not officially dollarized would also benefit from greater exchange rate flexibility.
• Reducing high public debt levels remains a key challenge in much of the Caribbean, along with further
efforts to address long-standing competitiveness problems, notably in the tourism-dependent economies.
Addressing financial vulnerabilities is a priority in the Eastern Caribbean Currency Union.more
efforts to address long-standing competitiveness problems, notably in the tourism-dependent economies.
Addressing financial vulnerabilities is a priority in the Eastern Caribbean Currency Union.more
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