OECD lowers growth forecasts for 5 LAC nations

In its May economic outlook, the OECD reduced its growth forecast for 2019 GDP in five of the six Latin American member countries, with forecasts cut for 2020  as well for Argentina, Costa Rica and Mexico.

The report offered 2019 and 2020 forecasts for Latin America and Caribbean (LAC) of 1.4% and 2.4% respectively, noted as a weighted average of the five economies (Argentina, Brazil, Chile, Colombia, Costa Rica and Mexico) that comprise 82% of LAC GDP.

The following table indicates 2018 GDP results as well as 2019 and 2020 forecasts for OECD Latin American countries.

The report further noted that the global economy is stabilizing, though it does so with lower growth rates and recoveries across much of the world hindered by trade tensions and investor uncertainty, 

The organization lowered its global forecast for this year to 3.2% from 3.3%, while it predicts 3.4% for 2020 “well below the growth rates seen over the past three decades, or even in 2017-18,” the report noted .

“The global economy may have bottomed out, but the pickup is not enough to deliver growth that is robust, sustainable, and inclusive,” said OECD chief economist Laurence Boone (pictured) in a statement with the report. “Some say it's the new normal. But we can't accept an economy that doesn't work for everyone; governments need to act.”

She added, “first, the mediocre growth outlook is conditional on no escalation of trade tensions, which cut across the Americas, Asia and Europe. Simulations in this outlook’s first chapter show that renewed tensions between the United States and China could shave more than 0.6% from global GDP over two to three years…Primarily, based on a common diagnosis about trade issues, taking into account the interdependence of economies with production chains split across borders, it is imperative to reignite multilateral trade discussions.”

Boone suggested that actions ought to help countries address weak growth, improve resilience and foster long-term, sustainable growth.

Policy priorities would need to include “investing in infrastructure, especially digital, transport and green energy, enhancing people’s skills, and more generally implementing policies that favor equal opportunities.”

LATIN AMERICA FOCUS

A regional analysis prepared with the broader report offered specific risks and suggested policy moves for the OECD’s six LAC nations, many of which include tax reforms to favor investment and productivity while reducing exemptions to the affluent. Other region-wide suggestions included reducing informality, bringing women into the workforce, closing gaps in infrastructure and logistics and “committing decisively to digitalization and innovation.”

The OECD offered the following country-by-country takeaways from the May outlook:

In Argentina, vulnerabilities are being reduced:

- Current macroeconomic policies are creating the conditions for greater stability, reducing fiscal and external imbalances. But in the short term, they can weigh on growth.

- Inflation is high, but will fall in the coming months due to strong monetary and fiscal contractions and better predictability of the exchange rate.

- Strengthening the independence of the central bank is key to reducing inflation.

To grow in a strong and inclusive way, more reforms are needed:

- Greater integration in the global economy.

- Reduce entry barriers and administrative burdens to strengthen competition.

- Improve access to quality education and training, including for adults.

- Increase effective protection for formal and informal workers, but not for jobs.

In Brazil, the recovery has lost strength:

- Confidence levels will remain low and will limit the recovery of domestic demand until progress is seen regarding the implementation of reforms.

- Without a fiscal adjustment, the situation of public accounts is worrisome. High pension expenditure continues to deteriorate fiscal results, despite slight reductions in other spending areas.

- Approving a pension reform is key to avoid a fiscal crisis and at the same time improve the distributive impact of the pension system. There is room to reorient expenditures toward the most vulnerable households and reduce opportunities for corruption.

Structural reforms for stronger and more inclusive growth:

- Promote integration in the world economy by reducing trade barriers.

- Reduce entry barriers and administrative burdens to strengthen competition.

-Consolidating the fragmented system of indirect taxes is key to reducing compliance costs and thus increasing the competitiveness of Brazilian companies.

In Chile, the strong macroeconomic framework supports macroeconomic resilience and growth:

- The planned gradual consolidation is adequate and will put the debt-GDP ratio on a sustainable path.

- There is room to increase fiscal resources through the change in the tax mix that favors inclusive growth.

Priorities: increase productivity and reduce inequalities

- Simplify procedures and licenses; greater competition in key sectors; increase innovation and spending on research and development; improve logistics and transport infrastructure.

- Improve skills and quality education; ensure a good economic integration of growing immigration; reform to improve pensions.

In Costa Rica, fiscal sustainability requires additional fiscal measures:

- Apply the fiscal rule.

- Reduce budget constraints.

- Apply a multi-year expenditure framework.

- Establish a fiscal council.

- Rationalize the organization of the public sector and increase the efficiency of public services.

- Reform employment in the public sector.

Structural reforms:

- Improve respect for the legal framework and competition rules.

- Improve the education system and reduce inequalities.

- Increase women's labor participation.

- Improve opportunities for disadvantaged groups.

Mexico needs to set the following priorities, according to the OECD:

- Maintain a prudent fiscal policy to stabilize public debt.

- Improve access to quality education for all.

- Improve opportunities for disadvantaged groups.

- Improve respect for the principle of legality and competition rules.

- Use the additional tax collection to finance investments in infrastructure and education.

- Continue reducing reductions and tax exemptions.

- Improve the efficiency of tax collection.

- Increase the progressive quality of the individual income tax.