Latin America’s Strong Recovery is Losing Momentum, Underscoring Reform Needs

IMF Blog, January 31, 2022

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After a dramatic economic collapse in 2020, growth in the region rebounded to an estimated 6.8 percent in 2021.
Drivers of the 2021 rebound:
- Robust trading partners growth.
- Higher commodity prices.
- Favorable external financing conditions.
- Domestic factors: progress on vaccinations, continued fiscal support in some countries (e.g. Chile and Colombia), and accumulated savings from 2020.

For 2022, the IMF expects growth to slow to 2.4 percent, a downgrade from the October forecast of 3 percent.
Reasons for slowdown beyond normalization to pre-pandemic GDP levels:
- Slower growth in China and the United States.
- Continued supply disruptions.
- Tighter monetary and financing conditions.
- Emergence of the Omicron variant.

In Brazil, Chile, Colombia, Mexico and Peru, prices increased by 8.3 percent in 2021 — the largest jump in 15 years and higher than in other emerging markets.
Core inflation (excluding food and energy) rose by 6.3 percent in 2021, exceeding pre-pandemic trends and outpacing core price inflation in other emerging markets (5.3 percent on average).
Core price increases in selected countries:
- Brazil: 7.2 percent.
- Chile: 6.4 percent.
- Mexico: 5.9 percent.
Contributing factors to rising inflation:
- Surge in food and energy prices.
- Rising commodity and imports prices (in part due to global supply disruptions).
- Exchange rate depreciations.
- Released pent-up consumer demand and a shift in spending towards goods over services.
- In some countries, wage pressures and indexation practices.

Large central banks in the region reacted quickly and decisively to the sharp rise in consumer prices.
Policy rates in Brazil, Chile, Colombia, Mexico and Peru rose between 1.25 percentage points and 7.25 percentage points over the course of 2021.
Hikes were often combined with forward guidance signaling further rate increases.
Effects and expectations:
- The hike in policy rates has helped maintain anchored long-term inflation expectations and shored up central bank credibility (as noted in the October Regional Economic Outlook).
- Long-term inflation expectations remain relatively well-anchored; short-term inflation expectations are elevated.
- If rising inflation threatens to de-anchor expectations, central banks will need to raise interest rates further and accompany such actions with clear and transparent communication.

Ongoing uncertainty about the pandemic’s evolution continues to cloud the recovery.
Major risks include:
- Inflationary pressures in the United States and across the region, potentially prompting faster withdrawal of monetary accommodation.
- Potential change in investor risk sentiment and associated tighter global and domestic financial conditions.
Policy preparations suggested for US monetary policy tightening:
- Extending public debt maturities.
- Reducing fiscal rollover needs more generally.
- Limiting the buildup of currency mismatches on financial sector balance sheets where possible.

Pre-existing context: the pandemic hit after a year of widespread social unrest following years of economic stagnation after the commodity boom.
Three simultaneous major challenges for countries in the region:
- Ensuring the sustainability of public finances.
- Raising potential growth.
- Doing so in a manner that promotes social cohesion and addresses social inequities.
Policy guidance:
- Start now to develop a comprehensive strategy to address these challenges and build societal consensus.
- Combine fighting inflation with structural policies that reignite growth.
Opportunity:
- Countries in Latin America and the Caribbean have a unique opportunity to reinvigorate growth engines and to build toward a more prosperous, sustainable, and inclusive region.

Source: IMF blog post "Latin America’s Strong Recovery is Losing Momentum, Underscoring Reform Needs" (January 31, 2022).