Preliminary Overview of the Economies of Latin America and the Caribbean 2006

Summary An economic growth rate of 5.3% is estimated for 2006, which means that the Latin American and Caribbean region will mark a third consecutive year of growth at over 4%. Thus, the region has again performed well in comparison with past periods, but it continues to fall short of other developing regions. With the international environment remaining favourable, the volume of goods and services exports was up by 8.4% for the region as a whole and the main export prices rose, which translated into a terms-oftrade improvement equivalent to over 7%. As a result of these income gains, and of increased remittances from abroad, growth in national income (7.2%) again exceeded GDP expansion. In addition, other factors, such as growing investor and consumer confidence after several years of sustained growth, real interest rates that remained relatively low despite recent hikes in many countries, a stronger boost to public spending, an expansion in total wages driven by rising employment and a modest upturn in real wages, have helped to make domestic demand into an additional engine for growth. In fact, domestic demand rose by 7.0%, with gross domestic investment up by 10.5% and consumption by 6.0%. Public spending rose in several countries as a result of larger investments in physical and social infrastructure and higher current spending. But since fiscal revenues climbed even more steeply, the prevailing picture shows central governments with higher primary surpluses (up from 1.7% to 2.2% of GDP as a simple average of 19 countries) and narrower overall deficits (from 1.1% to 0.3% of GDP). Alert to changes in international interest rates and to the effects of surging domestic demand and rising fuel prices, many countries’ monetary authorities raised benchmark rates, especially in the first half of the year. In most cases, this did not slow economic activity, given the abundant liquidity. Nevertheless, inflation decreased in most of the countries and, in weighted terms, it came down from 6.1% in 2005 to 4.8% in 2006. Many countries had to deal with downward pressure on the exchange rate because of large inflows of foreign currency generated by stronger export prices or remittances.