CHAPTER 1 — Looking Back: Six Months in Six Snapshots
The global outlook worsened in the second quarter of 2011 as stimulus programs failed to achieve self-sustained growth in the developed world, leading to a downward revision of past economic data and future growth prospects. Output gaps that may be larger than previously thought plus the eventual risk of a disorderly default in Europe kept risks tilted downward. In China, growth is still about 9 percent, but inflation is inducing a monetary tightening that may hinder growth.
After a strong recovery, Latin America is starting to feel the combined effects of financial stress and dwindling global demand. The LAC-7 countries— Argentina, Brazil, Colombia, Chile, Peru, Mexico and Uruguay—are expected to outperform developed countries and other LAC countries, but the growth recoupling typical of systemic crisis periods indicates that the final score may be disappointing if the global outlook continues to deteriorate.
Real exchange rates have pulled back in the third quarter after moderately appreciating in the first six months, to end close to the beginning-of-theyear levels. In turn, inflation peaked by midyear, partially contained by currency appreciation, the stabilization of commodity prices and, more recently, weaker domestic demand. Inflation expectations should be additionally tamed by the anticipated global slowdown.
With inflation risk slightly tilted toward the downward, central banks chose an early end to their tightening cycles and are now moving toward a data-dependent easing stance. Peru, Uruguay and Brazil have pushed their fiscal primary balances to a safer zone, in line with the tightening bias inmonetary policy. By contrast, primary balances in Colombia and Chile have continued to weaken (in the latter, due to natural disasters). In fast-growing Argentina, the political cycle leading to the October 24 elections has dominated fiscal considerations, but a mild adjustment is expected for 2012.