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

IMF News, October 13, 2023

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Growth in Latin America and the Caribbean is projected to moderate from 4.1 percent in 2022 to 2.3 percent in 2023.
Growth is projected to remain around this rate in 2024.
Headline inflation in the region (excluding Argentina and Venezuela) reached 7.8 percent in 2022 and is anticipated to decline to 5 percent in 2023 and to 3.6 percent in 2024.
Global context: emerging market and developing economies are projected to have 4.4 percent average growth, while the region’s GDP is expected to expand annually at about 2½ percent over the medium term.

Tighter policies implemented to contain inflation.
Weakening external environment, including:
- Slower growth in trading partners.
- Tighter external financing conditions.
- Lower commodity prices.
Easing global supply constraints and lagged effects of currency appreciation contributing to disinflation.

External risks:
- Lower growth in main trading partners.
- Commodity price volatility.
- New inflationary shocks.
- Renewed turbulence in global financial markets.
- Intensification of geopolitical tensions.
Regional and domestic risks:
- Potential reemergence of inflationary pressures.
- Increased social tensions.
- Climate-related shocks, with particular vulnerability in Central America, Panama, the Dominican Republic subregion, and the Caribbean, including impacts on outward migration.
Specific climate event risk:
- El Niño could negatively impact economic activity through floods in Ecuador and northern Peru, and through droughts in Colombia, Central America, and southern Peru; Argentina, Paraguay, and Uruguay may benefit from increased precipitation.

The swift response of the region’s central banks played a key role in controlling inflation.
Most central banks are well placed to move forward with gradually easing tight monetary policy stances, but should remain attentive to risks.
Policymaking challenge: “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.”
Important considerations:
- Pace of monetary easing.
- Proper assessment of the impact of past tightening on inflation, noting that monetary policy operates with lags.
- Central bank communication is instrumental to the success of disinflation.

Fiscal policy should focus on rebuilding policy space to ensure fiscal sustainability and boost resilience against future shocks, while protecting key social spending needs.
Public debt remains high and is projected to remain above that of their peers by 2028.
Most countries have plans to strengthen public finances and further reduce debt over the medium term; achieving 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.

Main structural impediments to growth:
- Lackluster productivity.
- Low investment.
- Labor market rigidities.
Priorities highlighted:
- Tackle productivity weaknesses, low investment, and labor market rigidities.
- Enhance trade, including within the region, to capture growth opportunities.
- Adapt to the changing global landscape:
- Energy transition offers opportunities for mineral-rich countries but requires adequate investment frameworks to attract capital.
- Adoption of new digital technologies calls for greater efforts to improve the quality of education.
- Strengthen social cohesion:
- Strengthening social protection mechanisms.
- Tackling insecurity.
Goal: boost sustainable and inclusive growth by addressing long-standing structural challenges, adapting to new ones, and enhancing social cohesion.

Income Volatility and Social Insurance in Latin America:
- Latin America has historically had aggregate income volatility higher than other emerging economies and twice as high as advanced economies.
- Large income swings can disrupt household consumption and investment, push individuals into poverty, and lead to social unrest.
- The chapter documents income volatility and the role of social insurance in mitigating 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; closing the infrastructure gap can yield sizable trade and output gains.
- The region is relatively well placed to withstand a mild scenario of global trade tensions (fragmentation) limited to large economies, though output losses could be sizable in more extreme scenarios.
- Policy recommendations include reducing trade barriers, improving infrastructure, and putting in place policies that attract investment to foster trade and mitigate fragmentation risks.

IMF Communications Department — October 13, 2023

background-paper-1-en
- background-paper-1-en (Markdown version)
- background-paper-1-en (PDF)
Trade Integration and Implications of Global Fragmentation for Latin America and the Caribbean (Background Paper 2 — IMF)
- Trade Integration and Implications of Global Fragmentation for Latin America and the Caribbean (Background Paper 2 — IMF) (Markdown version)
- Trade Integration and Implications of Global Fragmentation for Latin America and the Caribbean (Background Paper 2 — IMF) (PDF)