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

_IMF Blog, January 31, 2022_

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**Canonical URL:** [Latin America’s Strong Recovery is Losing Momentum, Underscoring Reform Needs](https://www.imf.org/en/blogs/articles/2022/01/31/blog-latin-america-strong-recovery-is-losing-momentum-underscoring-reform-needs)

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## Bibliographic details
- Authors: Ilan-Goldfajn, Anna Ivanova, Jorge Roldos
- Published: January 31, 2022

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### Economic recovery and 2021 rebound
- 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.

### 2022 outlook and downgrade
- 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.

### Surging prices and inflation dynamics
- 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.

### Monetary policy response
- 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.

### Lingering uncertainty and risks
- 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.

### Major challenges and policy priorities
- 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).*

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## References

- [Português](https://www.imf.org/pt/News/Articles/2022/01/31/blog-latin-america-strong-recovery-is-losing-momentum-underscoring-reform-needs)
- [October](https://www.imf.org/en/Publications/REO/WH/Issues/2021/10/21/Regional-Economic-Outlook-October-2021-Western-Hemisphere)
- [inflation.](https://blogs.imf.org/2021/11/16/latin-americas-inflation-challenge/)
- [https://www.imf.org/wp-content/uploads/2022/01/WHD-REO-Blog-Chart-1-1.jpg](https://www.imf.org/wp-content/uploads/2022/01/WHD-REO-Blog-Chart-1-1.jpg)
- [https://www.imf.org/wp-content/uploads/2022/01/WHD-REO-Blog-Chart-2.jpeg](https://www.imf.org/wp-content/uploads/2022/01/WHD-REO-Blog-Chart-2.jpeg)
- [https://www.imf.org/wp-content/uploads/2022/01/WHD-REO-Blog-Chart-3.jpeg](https://www.imf.org/wp-content/uploads/2022/01/WHD-REO-Blog-Chart-3.jpeg)
- [https://www.imf.org/wp-content/uploads/2022/01/WHD-REO-Blog-Table.jpg](https://www.imf.org/wp-content/uploads/2022/01/WHD-REO-Blog-Table.jpg)

_Source: https://www.imf.org/en/blogs/articles/2022/01/31/blog-latin-america-strong-recovery-is-losing-momentum-underscoring-reform-needs_