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Congonhas airport in Sao Paulo, July 11, 2011. Latin American ecomomies are showing strength, the UN says. REUTERS/Nacho Doce


The economy of Latin America will likely expand more quickly than previously expected in 2011, but is vulnerable to capital flows that may generate price bubbles, a United Nations' economic body said Wednesday.

The UN's Economic Commission for Latin America and the Caribbean, or ECLAC, raised its regional economic growth view to 4.7 per cent for full-year 2011 from a previous forecast of 4.2 per cent.

The region's economy will likely grow 4.1 per cent in 2012, ECLAC said.

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However, the body warned that the movement of short-term speculative capital in the region could generate price bubbles in financial and real estate assets.

ECLAC also highlighted risks stemming from strong currencies in the region.

"The region's economic authorities must implement measures to ease currency appreciation, (by) combining exchange interventions, capital controls and financial regulations," it said in a regional economic report.

Latin American nations have struggled to tame their currencies as a widening economic growth differential with rich nations has lured billions of dollars into the region.

A flood of cheap imported goods is hurting local manufacturers and raising pressure on governments to act.

In Brazil, which has one of the world's most overvalued currencies, economic growth could slow to 4 per cent in 2011, ECLAC said. The Brazilian economy will likely also hit 4 per cent in 2012, it said.

A slowdown in economic activity in Latin America's biggest economy has allayed fears of overheating, ECLAC chief Alicia Barcena said in a news briefing.

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Ms. Barcena said the body sees less risk of overheating in the region during the second half of the year as economic growth slows.

Last month the International Monetary Fund lowered its forecast for Brazil's gross domestic product to 4.1 per cent this year from 4.5 per cent in April.

Alberto Ramos, a senior economist with Goldman Sachs, agrees that the Brazilian economy shows signs of moderation, but says the region still needs to ease domestic demand to minimize overheating and high inflation risks.

"Authorities will have to take measures to slow down and moderate domestic demand, and that will imply a tighter fiscal and tighter monetary policy," Mr. Ramos said.

ECLAC raised its economic growth forecast for Mexico to 4 per cent in 2011. It predicts the region's No. 2 economy will grow 4 per cent next year.

"Regional growth in 2011 is largely due to private consumption, which is explained by improved labour data and an increase in credit," it said.

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Venezuela is seen growing 4.5 per cent in 2011, after shrinking 1.4 per cent in 2010 on weak domestic demand linked to a fall in state income and electricity rationing following a drought, the report said.

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