The region will expand 3.2 percent this year and 3.9 percent in 2013, compared with the previous estimates of 3.4 percent and 4.2 percent, the Washington-based lender said today in its World Economic Outlook. Brazil will expand 4 percent next year, compared with a 4.6 percent estimate in July, while Mexico’s forecast was lowered to 3.5 percent from 3.6 percent.
“The main near-term risks relate to an escalation of the euro area crisis and the U.S. fiscal cliff,” the IMF said, referring to a possible slump in spending if Congress can’t agree on more moderate cuts. “Policy makers in the region must be alert to spillovers from weaker prospects in advanced economies and major emerging markets outside the region, volatile capital flows, and emerging domestic financial risks.”
Brazilian President Dilma Rousseff’s government is working to revive the economy, which analysts forecast will expand this year at the slowest pace among major emerging markets. Since August 2011, policy makers have reduced the benchmark Selic rate 500 basis points to a record 7.5 percent, extended tax cuts for consumers and pressured banks to lower lending costs. Traders are betting on an additional 25 point rate cut this week.
In Mexico, annual inflation has remained above the upper limit of the central bank’s 2 percent to 4 percent target range since June as a bird-flu outbreak and drought pushed up egg, poultry and corn prices. Mexico has left its main interest rate unchanged since 2009, and growth has topped Brazil’s for the past year as the nation benefited from the recovery in the U.S., its largest trade partner.
While inflation is a concern in much of the region, particularly Venezuela and Argentina, “monetary policy should be the first line of defense if global growth slows more than expected, especially in economies with established and tested inflation-targeting frameworks,” the IMF said.