Latin America’s strong recovery is running out of steam, implied…

(MENAFN-Caribbean News Global)

By Ilan Goldfajn, Anna Ivanova and Jorge Roldos

The economies of Latin America and the Caribbean are losing momentum after making a strong comeback last year.

After a dramatic economic collapse in 2020, growth in the region rebounded to around 6.8%, driven by robust growth in trading partners, rising commodity prices and favorable external financing conditions. On the domestic front, progress in immunization, continued fiscal support in some countries (eg, Chile and Colombia), and accumulated savings from 2020 also supported growth.

For 2022, we expect growth to slow to 2.4%, down from our October forecast of 3%.

A slowdown is inevitable as economies return to pre-pandemic GDP levels. But the downgrade reflects other challenges, including slower growth in China and the United States, continued supply disruptions, tighter monetary and financial conditions, and the emergence of the Omicron variant.

The price spike

Last year was marked by a rise in inflation. In some of the largest economies in the region (Brazil, Chile, Colombia, Mexico and Peru), prices rose 8.3% in 2021 – the biggest rise in 15 years and higher than in other emerging markets .

This rapid increase partly reflects soaring food and energy prices. Core inflation, excluding food and energy prices, increased less (6.3%), but still exceeded pre-pandemic trends and exceeded core inflation. underlying price in other emerging markets (5.3% on average).

Underlying prices rose rapidly in Brazil (7.2%), Chile (6.4%) and Mexico (5.9%), suggesting that inflation is threatening to become widespread, although there are substantial variations between economies.

Many factors have contributed to the rise in inflation: rising commodity and import prices (partly due to global supply disruptions), exchange rate depreciations, as well as the release of the pent-up consumer demand and a shift in spending towards goods rather than services. In some countries, wage pressures and indexation practices (contracts that automatically adjust their terms to inflation) are pushing prices even higher.

Respond decisively

Given the region’s history of high inflation, major central banks reacted quickly and decisively to the sharp rise in consumer prices.

The speed of monetary policy tightening has varied across countries depending on their position in the business cycle, the degree and depth of price pressures, and central bank credibility. In Brazil, Chile, Colombia, Mexico and Peru, policy rates increased between 1.25 percentage points and 7.25 percentage points during 2021. These were often combined with forward-looking indications of further rate hikes in the months ahead.

Rising policy rates have helped keep inflation expectations anchored, as we noted in our October Regional Economic Outlook, while bolstering central banks’ hard-earned credibility. Long-term inflation expectations remain relatively well anchored, reflecting confidence in monetary policy. policy aimed at bringing inflation back to target. However, near-term inflation expectations are elevated, suggesting the need for continued vigilance and possible further action by central banks in some countries.

If rising inflation threatens to unanchor inflation expectations, central banks will need to raise interest rates further to signal a continued commitment to inflation targets and to avoid persistent price increases. This should be accompanied by clear and transparent communication.

Continuing uncertainty

Uncertainty about the evolution of the pandemic more broadly continues to cast a shadow over the recovery globally and in Latin America and the Caribbean.

Inflationary pressures in the United States and across the region, which may necessitate an even faster withdrawal of monetary easing, the potential change in investor risk sentiment and the resulting tightening of global and domestic financial conditions also represent major risks for the recovery. Policymakers could prepare for US monetary policy tightening by extending public debt maturities, reducing fiscal refinancing needs more generally, and limiting, where possible, the build-up of currency mismatches in the financial sector balance sheets.

Major challenges ahead

The pandemic hit after a year of widespread social unrest in the region, which had built up over years of economic stagnation following the end of the commodity boom. With a busy electoral calendar looming, social unrest remains a major risk and inequalities will need to be tackled.

The countries of the region must meet three major challenges simultaneously: ensuring the sustainability of public finances; increase potential growth; and do so in a way that promotes social cohesion and addresses social inequalities.

Addressing these challenges, which began even before the pandemic, will take time. Policy makers should start now to develop a comprehensive strategy to deal with it and build societal consensus around this strategy.

Countries in Latin America and the Caribbean region have a unique opportunity to reinvigorate the engines of growth and move towards a more prosperous, sustainable and inclusive region.

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