Press Release No. 23/349

Western Hemisphere Regional Economic Outlook: Securing Low Inflation and Nurturing Potential Growth

October 13, 2023

• Following a strong rebound from the pandemic and continued resilience in early 2023, economic growth in Latin America and the Caribbean is projected to moderate from 4.1 percent in 2022 to 2.3 percent in 2023. Headline inflation in the region (excluding Argentina and Venezuela) has been declining and is anticipated to reach 5 percent in 2023, compared to 7.8 percent in 2022.
• Thanks to improved macroeconomic management, the region can focus on how to boost growth by addressing long-lasting challenges, including lackluster productivity, low investment, and labor market rigidities.
• The changing global environment also presents new challenges and opportunities, like climate change and the irruption of new digital technologies. Preserving social cohesion should be a centerpiece of any policy plans, including through strengthening social protection mechanisms and tackling insecurity.

Marrakech, Morocco: After a strong rebound from the pandemic and continued resilience in early 2023, growth in Latin America and the Caribbean is projected to moderate from 4.1 percent in 2022 to 2.3 percent this year and remain around this rate in 2024. Inflation is expected to converge gradually toward central banks’ targets, according to the latest IMF Regional Economic Outlook report for the Western Hemisphere released today.

“Latin America has successfully weathered recent global shocks and showed a strong performance in 2022 and early 2023, although growth is softening. The slowdown reflects tighter policies to contain inflation and weakening external environment, including slower growth in trading partners, tighter external financing conditions, and lower commodity prices”, said Rodrigo Valdes, director of the IMF’s Western Hemisphere department.  

After reaching 7.8 percent in 2022, headline inflation in the region (excluding Argentina and Venezuela) is expected to decline to 5 percent in 2023 and to 3.6 percent next year, driven by weakening external and domestic demand, easing global supply constraints, and the lagged effects of currency appreciation in some countries.  

The risks to the outlook appear more balanced compared to April 2023, although they remain titled to the downside. External risks include lower growth in main trading partners, commodity price volatility, new inflationary shocks, renewed turbulence in global financial markets, and an intensification of geopolitical tensions.

At the regional level, downside risks relate to a potential for reemergence of inflationary pressures and increased social tensions. Climate-related shocks also pose important challenges over the short and medium term, especially for Central America, Panama, the Dominican Republic subregion, and the Caribbean, including through their impact on outward migration.

The region should also prepare for the impact of El Niño as this climate phenomenon could negatively impact economic activity through floods in Ecuador and northern Peru, and through droughts in Colombia, Central America, and southern Peru. Luckily, other countries like Argentina, Paraguay, and Uruguay may benefit from a much-needed increase in precipitation.

As inflation comes down and growth slows, policymakers will need to calibrate policies carefully. The swift response of the region’s central banks played a key role in controlling inflation and most are well placed to move forward with gradually easing their tight monetary policy stances, although they should remain attentive to risks. 

“Prudent easing will continue to require a careful balance between placing inflation on a durable downward path while minimizing the risk of a prolonged period of low growth. Key to achieving the right balance is the pace of monetary easing and a proper assessment of the impact of past tightening on inflation, as monetary policy operates with lags. Central bank communication remains instrumental to the success of the disinflation effort”, added Mr. Valdes.

Fiscal policy should focus on rebuilding policy space to ensure fiscal sustainability and boost resilience against future shocks, while protecting key social spending needs. Despite a generally timely withdrawal of the pandemic fiscal support, public debt remains high and is projected to remain above that of their peers by 2028. Most countries in the region have plans to strengthen public finances and further reduce debt over the medium term, but this will require significant efforts and discipline. The pace of fiscal consolidation should weigh the strength of economic activity and the evolution of debt-servicing costs.

Over the medium term, prospects for strong growth across Latin America remain subdued. While globally, emerging market and developing economies are projected to have 4.4 percent average growth, the region’s GDP is expected to expand annually at about 2½ percent, similar to its pre-pandemic historical average. Boosting sustainable and inclusive growth requires addressing long-standing structural challenges, adapting to new ones, and enhancing social cohesion. Mr. Valdes pointed to the following priorities:

“Addressing long-lasting challenges includes tackling lackluster productivity, low investment, and labor market rigidities. Enhancing trade, including within the region, can also bring significant opportunities for growth.

“Bolstering sustainable growth will also require adapting to the changing global landscape. The energy transition offers an opportunity for mineral-rich countries in the region, but they will need adequate investment frameworks to attract the needed capital. Meanwhile, the adoption of new digital technologies calls for greater efforts to improve the quality of education.

“Despite progress in the past decades, poverty and inequality remain high in the region.  Strengthening social cohesion should be a centerpiece of any policy plan and reform agenda, and this will require strengthening social protection mechanisms and tackling insecurity.”

###

For more details, see the Western Hemisphere Regional Economic Outlook landing page, and report, titled: Securing Low Inflation and Nurturing Potential Growth, and accompanying analytical chapters:

• Income Volatility and Social Insurance in Latin America: Historically, Latin America has been a volatile region, with aggregate income volatility higher than in other emerging economies and twice as high as in advanced economies. Large income swings can disrupt household consumption and investment decisions, push individuals into poverty, and lead to social unrest. This analytical chapter documents the level and evolution of income volatility in Latin America and the role of social insurance in mitigating this volatility.

• Trade Integration and Implications of Global Fragmentation for Latin America and the Caribbean: Countries in the region trade substantially less than other emerging markets. Poor infrastructure is an important impediment to trade and closing the infrastructure gap can yield sizable trade and output gains. This analytical chapter also finds that Latin America and the Caribbean is relatively well placed to withstand a mild scenario of global trade tensions (fragmentation), in which trade barriers are erected only among large economies, although output losses could be sizable in more extreme scenarios. Fostering trade, especially within the region, by reducing trade barriers, improving infrastructure, and putting in place policies that attract investment could pay a double dividend of boosting growth while mitigating the risks from global fragmentation.