Latin America remains surprisingly economically stable

Geopolitics is elevating the continent’s role as a business location and trade partner. With trade agreements with Mexico and Mercosur, the EU has now positioned itself strategically.

 by Alexander Busch, Latin America correspondent for Handelsblatt and NZZ

At the midpoint of the year, the region is proving more resilient than the political and economic uncertainty in the global economy and world politics would suggest. No country is facing the threat of a recession or a political crisis.

However, the reasons for the economic stability vary from country to country.

Brazil and Colombia are in election campaign mode. The governments are trying to win votes through government spending programs. This has boosted growth in the short term. However, social spending and minimum wage increases are unlikely to be sustainable in the medium term, which means that growth forecasts for 2027 are weaker in both countries.

In Argentina and Peru, by contrast, the economy is being supported by exports and investments, particularly in mining and energy. Together with Chile, these economies will perform best in the region next year, with growth rates exceeding three percent.

Mexico remains the exception: there, economic development continues to be volatile and well below potential, despite some impetus from abroad.

For several reasons, the outlook for the region is stable.

For instance, Latin America is a strategic winner of the global upheaval and current conflicts. As a supplier of critical raw materials, food, and energy, the region is gaining equal importance for Europe, the U.S., and China.

Latin America possesses large reserves of copper, lithium, iron ore, silver, bauxite, and rare minerals needed for the energy transition, digitalization, and defense. Chile and Peru supply around 40 percent of the world’s copper, and Argentina is part of the “lithium triangle.”

Brazil, Guyana, and Argentina possess significant oil and gas reserves, and production is on the rise. This also applies to Venezuela, which is ramping up its oil and gas production once again. At the same time, the region utilizes one of the world’s highest shares of renewable energy.

Brazil and Argentina are among the leading exporters of soybeans, corn, sugar, meat, and other agricultural products. Agricultural potential is high throughout South America.

Compared to Eastern Europe, the Middle East, or parts of Asia, South America is considered relatively conflict-free despite growing internal security issues. This makes the region attractive to investors and companies.

The region is beginning to benefit from the diversification of Western supply chains: Europe and the U.S. are seeking alternatives to China and Russia. At the same time, however, China and other Asian emerging economies are also expanding their relationships with South American commodity exporters and increasing their investments in infrastructure.

They are also drawn to a market of around 670 million people. For European companies, competitive pressure in the region’s major economies has therefore increased significantly.

With the renewed trade agreements with Mexico and Mercosur, the EU has now strengthened its ties with Latin America just in time. For industry in particular, the agreements provide improved market access and business conditions.

While the U.S. under Donald Trump continues to rely more heavily on tariffs and protectionism and China is expanding its influence in the region, European companies now have a competitive advantage over foreign competitors in Latin America. This is particularly crucial for small and medium-sized enterprises in the industrial sector.

The agreements not only provide European industry with better market access but also facilitate access to raw materials and more stable supply chains.

Politically, important decisions are on the horizon in South America: presidential elections are taking place in Peru, Colombia, and Brazil. These three countries account for roughly half of the population and economic power of all of Latin America. It remains to be seen which candidates will prevail. Politics is highly polarized in all three countries. Nevertheless, recent years have shown that economic development is more decoupled from the ideological orientation of governments than it appears during election campaigns.

It is also unclear how the growing influence of the U.S. in Latin America will affect cooperation with Europe. Since the U.S. government announced its new security strategy for Latin America at the end of last year, Washington has been noticeably expanding its influence in the region. Growing investments in mining and critical minerals demonstrate that Washington’s primary goal is to reduce Chinese influence in Latin America.

As the example of Venezuela shows, Washington does not hesitate to use military force to assert its influence. The extent to which this strategy will affect European companies in the future remains to be seen.