Following two previous shocks, Latin America faces new challenges: the tightening of global financial conditions and the slowdown of the region's momentum. The global economy continues to face steep challenges and this year’s shock will re-open economic wounds that did not heal completely after the pandemic hit, warns the International Monetary Fund (IMF).
Latin America is still growing, “but financing is becoming scarcer and costlier as major central banks raise interest to tame inflation,” according to the IMF. As a result, economic activity has started to decelerate as higher rates affect domestic credit, investments and private consumption. Earlier in 2022, the region continued to grow as surging commodity prices attracted investors, especially amid global needs for energy suppliers and food. The positive momentum also helped to offset the effects of tighter global financial conditions. However, the higher interest rates have reduced the cushioning effect, potentially affecting exports, remittances and tourism.
In July, IMF projected 3 percent growth for Latin America during 2022 and in October, it adjusted its forecast to 3.5 percent. On the other hand, the organization forecasts a slowdown in 2023, putting economic growth at 1.7 percent.
Latin America is still expected to continue facing high inflation levels. Even though central banks hiked interest rates to help inflation go down, it will take time for domestic demand to exert downward pressure on prices. Countries such as Brazil, Chile, Colombia, Mexico and Peru have experienced broadened price pressures, leading inflation to reach a two-decade high in some cases. IMF has increased its inflation forecast to 7.8 percent by year-end.
“We estimate that there is about a one in four probability that global growth next year could fall below the historically low level of 2 percent. If any of the risks materialize, global growth will decline to 1.1 percent with quasi-stagnant income-per-capita in 2023,” according to the IMF’s calculations. The likelihood of this outcome is 10-15 percent.
IMF recommends that “going forward, monetary policy should stay the course and not ease prematurely.” While setting policies during a period of high uncertainty and volatility is challenging, the repercussions if inflation becomes entrenched would be very costly.