Regional Economic Outlook: Western Hemisphere

Regional Economic Outlook, November 2, 2022

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The Western Hemisphere (the United States/Canada and Latin America and the Caribbean (LAC)) has been dominated by two distinct global shocks: the COVID-19 pandemic and the Russian invasion of Ukraine; a third shock—the tightening of financial conditions—is now shaping the outlook.
After contracting sharply in 2020, most Western Hemisphere economies recovered strongly in 2021 and early 2022, helped by the global recovery, the normalization of service sectors, and booming commodity prices.
Inflation pressures built up due to pandemic-related disruptions, expansionary policies, rebounding demand, and the impact of the war in Ukraine on energy and food prices.
LAC’s monetary authorities responded swiftly to rising inflation—well ahead of other economies—which helped contain price pressures and keep long-term inflation expectations anchored; nevertheless, inflation remains high.

Activity is expected to decelerate throughout the Western Hemisphere in late 2022 and 2023 amid global monetary and financial tightening, slower global growth, and softening commodity prices.
Inflation pressures are expected to recede gradually.
Downside risks dominate the outlook, stemming from:
- tighter financial conditions;
- a more pronounced global slowdown; and
- entrenched inflation.
LAC-specific important risks include a sharp fall in commodity prices and social unrest.

Monetary policy:
- With inflation yet to abate and most economies operating at or near potential, monetary policy should avoid easing prematurely and must stay the course.
- Clear communication of policy intentions is key to reducing uncertainty and keeping inflation expectations anchored.
Fiscal policy:
- Fiscal support to mitigate the impact of inflation on the most vulnerable should be accompanied by compensating measures where fiscal space does not exist, and should support monetary authorities’ efforts to tame inflation.
- Given rising financing costs, strengthening fiscal frameworks and advancing inclusive fiscal consolidation—that protects key social objectives—will be essential to credibly putting public debt on a firm downward path while ensuring social stability.

Boosting medium-term growth requires raising productivity and good-quality public and private investment.
Supply-side policies should focus on:
- strengthening human capital;
- simplifying and modernizing labor regulations; and
- lifting barriers to firm entry and exit.