Latin America Faces Slowing Growth and High Inflation Amid Social Tensions

IMF Blog, February 1, 2023

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Authors: Gustavo Adler, Nigel Chalk, Anna Ivanova
Published: February 1, 2023

Regional economic performance and inflation

In 2022, the region’s economy expanded by nearly 4 percent.
Employment recovered strongly in 2022.
The service sector rebounded from the damage caused by the pandemic.
Inflationary pressures are receding in many countries due to early and determined efforts of central banks and lower global prices of food and energy.
Core inflation (that is, excluding food and energy) remains high at around 8 percent in Brazil, Mexico, and Chile (and somewhat higher in Colombia but lower in Peru).
Bringing inflation back down to central banks’ targets is likely to be a protracted process that is subject to risks, including from increases in wage pressures.

Outlook and risks for 2023

Growth in 2023 is poised to slow to just 2 percent, amid higher interest rates and falling commodity prices.
Job creation and consumer spending on goods and services are both slowing.
Consumer and business confidence are weakening.
Growth will be held back by a slowdown in trading partners, particularly the United States and the euro area.
Downside risks continue to dominate, including from tighter-than-anticipated financial conditions and Russia’s war in Ukraine.

Socio-economic consequences and social tensions

Slowing growth, high inflation, and global uncertainty mean many people in the region will see their living standards decline in 2023 and will likely face increased anxiety about their future.
Growing social discontent and diminished trust in public institutions has been an important trend in the region for some time and was exacerbated during the pandemic.
Poorer people—particularly those employed in in-person services—bore the brunt of the pandemic’s economic fallout.
Government support during the pandemic helped but many were unable to fully insulate themselves, as shown by a noticeable increase in poverty.
Increased food insecurity is a key symptom of the lasting socioeconomic effects of the pandemic.
The region’s middle class faces a more unstable economic situation; many small businesses struggled during lockdowns and wages of middle-income workers were eroded by the subsequent surge in prices.
The possibility of unrest and political paralysis can erode confidence and weigh on economic activity.

Policy priorities and recommendations

Secure economic stability, spur growth and job creation, support entrepreneurship, and attend to pressing social needs to mitigate social discontent and restore confidence in public institutions.
Central banks must not weaken their resolve to bring down inflation; rate hikes in many economies are close to ending, but interest rates will likely need to stay high for some time to ensure inflation returns back down to target.
Fiscal policy should emphasize social spending to support the poor while bringing down public debt.
Mobilize revenues in a progressive, growth-friendly, and equitable manner to achieve fiscal goals; trust in government will continue to be undermined as long as the wealthy don’t pay their fair share in taxes.
Carefully prioritize spending and enhance the credibility of public institutions by emphasizing good governance and transparency.
Continue improving safety nets to ensure reliable and sufficiently generous social assistance for those who need it most.
Preserve fiscal and social measures so they do not crowd out deeper policy changes needed to improve productivity, incentivize investment, and facilitate job creation—these reforms are the principal means over time to raise living standards.

Gustavo Adler, Nigel Chalk, Anna Ivanova, February 1, 2023 — https://www.imf.org/en/blogs/articles/2023/02/01/latin-america-faces-slowing-growth-and-high-inflation-amid-social-tensions