Latin America’s economy caught in the maelstrom of the ailing global economy

In Latin America, the economic outlook is becoming gloomier. The weaker global economy is depressing growth forecasts for the region. The advantage is that the central banks in Latin America have already completed the cycle of interest rate hikes that Europe still has ahead of it.

by Alexander Busch, Latin America correspondent for Handelsblatt and Neue Zürcher Zeitung

 

The United Nations Economic Commission for Latin America and the Caribbean (CEPAL) has just published its latest growth forecasts for the region. According to these, growth will fall from 3.2 percent in 2022 to 1.4 percent as early as next year. The two most important economies on the continent in particular will stagnate: Brazil and Mexico will – according to CEPAL – each only grow by around one percent next year. Chile’s economy could even be the only country in the region to slip into recession (-0.9 percent).

The reasons for the weaker growth in Latin America than recently forecast are to be found less in the region than in the global economy. For example, investors’ risk assessments have risen worldwide. This is linked to the consequences of the Russian war against Ukraine, which is unsettling both companies and consumers. The outlook for the global economy has clouded over significantly.

Higher energy prices worldwide are continuing to fuel inflation. Central banks in industrialized countries are raising interest rates to curb price increases. As a result, less capital is automatically flowing into emerging markets such as Latin America.

The extent to which Latin America is dependent on the mood in the industrialized countries is particularly evident in the example of Mexico. There, it is primarily the remittances of emigrants from the USA that stabilize the economy. Remittances have doubled in the past twelve months. The Mexican central bank estimates that Mexicans in the U.S. could remit $60 billion south this year. That’s about as much capital as foreign investors and companies will invest in Brazil this year.

However, this dependence on remittances from the U.S. makes Mexico’s economy vulnerable: Currently, around four percent of economic output (gross domestic product) consists of remittances from the U.S.. But the U.S. economy will grow at a slower pace in 2023. As a result, emigrants will probably be able to remit less to their homeland next year – which will also cause Mexico’s economy to stagnate.

One positive aspect for Latin America, however, is that central banks in the region have made further progress in combating inflation. The interest rate hike cycles in Brazil, Chile, Colombia, but also in Peru and Mexico are coming to an end – this means that the region is much further ahead than Europe or the USA in fighting inflation.

Across the region, banks have raised interest rates faster and more sharply than has happened in the rest of the world. Brazil, for example, raised its key interest rate from 2 to 13.75 percent in one year. Inflation has fallen from 12 to 8 percent in the process.

This is positive for the region: falling interest rates will boost investment and consumption in Latin America more quickly than in Europe and the USA.

Santiago de Chile
© Pixabay/likesilkto

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