World Bank lowers Latin American growth forecast to 3 percent

WASHINGTON Wed Oct 3, 2012 5:50pm EDT

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WASHINGTON (Reuters) - Economic growth in Latin America will be lower than previously estimated due to the continuing worldwide slowdown, the World Bank said in a report on Wednesday.

It forecast growth at 3 percent this year, below its previous projection of 3.5 to 4 percent.

For 2013, growth for Latin America was forecast at 3.8 to 4 percent, according to a semiannual report from the World Bank's chief economist for Latin America and the Caribbean. The report's findings were in line with forecasts from the United Nations on Tuesday.

Declining growth in powerhouse China poses the greatest immediate risk to the region now that the euro zone is less likely to break apart, Augusto de la Torre, the chief economist, said.

Booming from a growth in commodities, Latin America is still largely dependent on exports and vulnerable to a decline in global demand, especially from key trade partner China.

"One of the most important aspects is China's situation," de la Torre said.

He said the longer-term effect of China on Latin America depends on what forces drive China's economy, with growth expected to fall below 8 percent for 2012, the lowest level since 1999.

Some economists believe China's decline is cyclical, a result of lower global demand for its goods, especially from Europe, while its monetary policy remains tight ahead of the political transition within the Communist Party.

Others believe China may be seeing a structural shift, in which the booming export-led growth of past decades transitions to more modest gains based on domestic growth.

De la Torre said a prolonged slowdown in China could have a more dramatic effect on export-reliant South American economies, such as Brazil and Argentina.

SMALLER RICH-POOR DIVIDE

Slowing growth in Latin America has not, however, translated into fewer jobs. The unemployment rate of 6.5 percent in 2011 approached historic lows, below peaks of 11 percent at the turn of the century.

Latin America is also one of the few regions in the world to see a narrowing gap between the rich and poor over the past decade, a trend that continued despite the global economic slowdown.

"Latin America is the only place in the world where income inequality is going down," de la Torre said.

The Gini coefficient, a key measure of inequality, has fallen sharply for 12 out of 15 countries in the region from 2000 to 2010 -- though the rich-poor divide remains higher than in most developed countries.

But the causes for the decline in inequality may be more troubling -- less to do with waning poverty and more to do with stagnating wages for the highest earners, or those with higher levels of education, according to the report.

One explanation is that lower-skilled workers are in greater demand in commodity-fueled booms than those with university degrees. But it could also signal that the quality of higher education is declining, meaning students with a degree may not necessarily find higher wages when they leave school.

"A more egalitarian society could be hiding some factors that could be a concern," de la Torre said.

(Reporting by Anna Yukhananov; Additional reporting by Alexandra Alper; Editing by Leslie Adler)

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