Weaker global economy to expose local vulnerabilities

Relative to the rest of the world, at least, the immediate outlook for Latin America remains good. Nonetheless, vulnerabilities are starting to emerge in a number of the region’s economies, which are likely to result in a period of below-trend growth over the next couple of years. A general theme across Latin America is that the recent boom in domestic demand has been sustained by record high global commodity prices. If they now fall back, as we expect, then the region’s consumer boom is likely to fade. Meanwhile, local risks are starting to emerge too. Credit growth is uncomfortably strong in a number of countries and a housing bubble has inflated in Brazil. The good news is that in most countries there is room to loosen policy in order to cushion the slowdown. On the markets, slower growth, coupled with the return of global risk aversion, is likely to mean that equities and currencies end this year below their current levels. But a rebound looks likely in 2013.