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Latin America’s slow and uneven economic recovery
Latin American and Caribbean countries were negatively impacted last year by the combination of the global recession, falling commodity prices, declining global trade and the pandemic, resulting in a decline in the region’s 2020 GDP of over 8%. Joaquin Thul discusses the 2021 outlook for Latin American economies.
According to the IMF, Latin America will grow by approximately 4.6% in 2021, which would beat the region’s 30-year average growth rate of 2.6%. The IMF expects the region to benefit this year from stronger global growth, improving international trade, rising commodity prices and a gradual recovery in services activity, thanks to wider availability of Covid-19 vaccines. Additionally, the region is expected to be supported by the spillover impact from higher GDP growth in the US in 2021. However, the pick-up in economic activity is expected to be slow and uneven across the region for several reasons.
Resurgence of Covid-19 cases and inflationary pressures
If the number of new Covid-19 cases remains high and vaccine rollouts are delayed, governments will need to extend their stimulus programs at a time when concerns about fiscal sustainability and inflation are rising. The combination of the strong monetary support measures implemented in 2020 and the recent increase in food and energy prices have fuelled inflationary pressures. Last year, central banks in Brazil, Colombia, Chile, Peru and Mexico cut interest rates to historic lows.
On 17 March, Brazil was the first country to tighten monetary policy with a 75bps increase in the Selic rate, the first increase in six years. While inflation pressures have gradually increased due to commodity price rises, negative output gaps i.e. the actual output below potential output, will help to keep inflation contained in most of the region, allowing central banks in Peru and Chile to delay any interest rate hikes until the end of 2021.
Limited scope for further fiscal stimulus
To support the economic recovery in 2021, countries will also need to maintain some of the fiscal plans from 2020. Last year fiscal stimulus was mixed across the region, with countries having to balance the need for fiscal discipline against providing necessary support during the pandemic.
Brazil was in a difficult position at the start of the pandemic. Congress approved an increase in fiscal spending, temporarily overruling the spending cap, financed by an increase in debt which pushed the debt ratio close to 100% of GDP and the government’s fiscal deficit to 17% of GDP. Brazil’s GDP declined by 4.1% in 2020, less than elsewhere on the continent, but it came at the cost of weak fiscal accounts and fears that more stimulus will be needed if the country fails to control the spread of the virus.
Argentina’s economy was already under stress before the pandemic, and fiscal stimulus, equivalent to 5.7% of GDP, was constrained by limitations on the country’s ability to issue new debt following the recent USD 65 billion debt restructuring. In Mexico, authorities prioritized fiscal stability and delivered a prudent stimulus package worth 2% of GDP. Household consumption was supported last year by direct government transfers and a pick-up in remittances which increased by USD 40 billion, representing 3.8% of GDP.
Politics take centre stage
Election years historically have not been periods during which Latin American governments undertake large spending cuts or tax hikes. The figure below highlights the busy election calendar across the region.
Therefore, although governments might acknowledge the need to consolidate the large fiscal deficits incurred during the crisis, this is unlikely to happen in 2021.
Growth in Latin America will remain slow and uneven during the first half of this year as the region gradually returns to normal levels of activity. With less space for stimulus policies than developed economies, countries will have to focus on controlling the virus and vaccinating their populations first, aiming for a faster recovery in the second half of 2021.
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