Will the Economies of Latin America Become Overheated?

On April 11, the International Monetary Fund published a report titled, “World Economic Outlook: Tensions from the Two-speed Recovery.” In it, the IMF raised its forecast for 2011 economic growth in Latin America to 4.7% from a previous forecast of 4.3%. While this is excellent news for the region, it doesn’t seem that the good news will continue for long: The report also warned that a group of nations it called the “Financially Integrated Commodities Exporters” -- Brazil, Chile, Colombia, Peru and Uruguay -- reveal “signs of a potential overheating, in which capital flows have already caused tensions.” German Sanhueza, professor of management at the University of Santiago de Chile (USACH), agrees with the IMF. Sanhueza notes that the overheating is directly due to increased public spending and growth in domestic consumption, which have also raised domestic prices and contributed to inflation. Adds Francisco Castañeda, also a professor of management at USACH, “This means there are serious risks for the region, such as the potential for an abrupt contraction in GDP over the short term, and a series of restrictions on fiscal policy that have until now been expansive in the majority of Latin American countries.” > Continue reading....