Slower economy in South America - Reduce your risk

April 18, 2007

The International Monetary Fund (IMF) lowered its forecast of economic growth in South America for 2007, thanks to the impact of the U.S. housing market decline. South America will grow less than 5% for both 2007 and 2008. This is slightly lower than last year’s 5.5% growth. The slowdown will be due to lower exports to the U.S., and lower prices for some of the commodities those countries export. The IMF is also seeing a slight uptick in inflation.

In North and Central America, the IMF forecast the following:

• U.S. - GDP growth revised down to 2.25%. This is lower than the Q4 2006 growth of 2.5%, and much lower than 3% growth for all of last year. The IMF blamed it on lower consumer spending, a result of the declining U.S. housing market.
• Canada - growth will be 2.5% in 2007, thanks to slower exports to the U.S.
• Mexico - growth will slow to 3.4%, down from 4.8% in 2006. The economy is doing well but will experience a slowdown thanks to a decline in demand from the U.S.

What the slower South American economy means:
The slowdown itself is gradual and fairly benign. Furthermore, domestic demand in South America in increasing, which should help cushion slower exports.

However, the IMF warns of some ongoing vulnerabilities that could allow nasty downward shocks. For one thing, most of the successful economies in South America, especially Brazil, still have large public debts, and imbalances between the rich and the poor. These countries’ struggle is to make sure the poor get more of the benefits of economic growth so that a) there aren’t large demonstrations of public unrest, and b)voters don’t elect populist leaders like Venezuela’s Hugo Chavez. To do this while decreasing bloated public spending, all in the face of a slower-growing economy, will be a neat trick.

The greatest risk to the region is the ongoing U.S. current account imbalance. For this to unwind safely, the U.S. must allow the dollar to decline gradually, which will allow U.S. exporters to ship goods more cheaply overseas. This will further reduce the exports of South American economies, such as Brazil.

Action steps:
If you’ve already reduced your exposure to the decline of South American economies, read no more. If you haven’t, then review doing so with your financial planner.

Source: Source: IMF, "Regional Economic Outlook: Western Hemisphere", April 2007

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