Few expected the significantly higher growth in the first quarter of this year. But the decisive factor for the longer-term economic trend will be when the central banks cut their interest rates. A fierce dispute has broken out in the region over this.
by Alexander Busch, Latin America correspondent for Handelsblatt and Neue Zürcher Zeitung
In the first quarter, growth in most Latin American economies was significantly higher than expected. At the beginning of the year, for example, the investment bank JP Morgan forecast contractionary growth of -0.4 percent in gross domestic product in the first quarter. Now, economists expect that the economy in the region may have grown by 2.1 percent.
The economies of Chile, Brazil and Mexico in particular grew significantly more strongly. This was due on the one hand to stable exports to China (Chile), record results in agricultural exports (Brazil) and the further recovery in domestic consumption (Mexico). Only in Peru, Uruguay and Argentina was growth significantly lower than expected.
But the recovery could soon be over again. The International Monetary Fund and most investment banks continue to forecast low growth for the region this year: After the 3.6 percent increase last year, growth is likely to fall to around one percent, according to JP Morgan. Oxford Economics expects growth of just 0.4 percent in the region’s six largest economies.
Because the economy is now threatening to cloud over again, governments in all countries have increased the pressure on the central bank and the finance minister. They want the banks to finally lower interest rates and the finance ministries to expand government budgets. Private consumption and investment could then increase, and the state would have more capital available to stimulate growth.
But the central banks refuse because they want to fight the still high inflation in their countries with a restrictive monetary policy. Their mandate is not growth, but monetary stability. Finance ministers are also trying to control spending so that deficits in national budgets do not grow again.
Brazilian President Luiz Inácio Lula da Silva, for example, repeatedly blames the central bank for slow growth. He would love to fire the central bank president. But that is not possible. The central bank is autonomous. Lula cannot replace the president until the end of next year.
In Colombia, Gustavo Petro has just replaced José Antonio Ocampo, his finance minister who is respected by investors, in a cabinet reshuffle. In Mexico, President Andrés Manuel López Obrador cut the salary of top officials because the central bank’s decisions are a thorn in his side.
However, the governments’ attacks on the central banks are having a negative effect: In Brazil, for example, inflation expectations for the end of 2023 have risen from around 5 to 6 percent. Investors fear that the central bank, under pressure from the government, could cut interest rates faster than necessary to meet the inflation target. In Colombia and Mexico, too, interest rate cuts are likely to start later than recently expected, thus weighing on growth.
The good news: In Uruguay, Latin America’s first central bank has now cut its key interest rate. In Chile, this could be the case from the middle of the year.