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Economic slowdown in Latin America: large economies lose momentum

2022-10-21T10:43:08.201Z


The data indicates that high interest rates are beginning to have an impact on the production of the main countries of the region


A woman works in a tomato greenhouse in the state of Querétaro, Mexico, on a farm whose exports have been paused to alleviate local inflation. Jeoffrey Guillemard (Bloomberg)

The brake on the economies of Latin America seems to have gone from being a warning to a reality.

The most recent figures from Brazil, Chile and Mexico, among other countries, show that economic activity is slowing down.

Strong central banks and stable public finances will be the keys to weathering the storm and avoiding an increase in poverty, experts point out.

Political risk also emerges as one of the greatest for growth.

In Brazil, the index of economic activity published by the central bank on Monday surprised analysts by falling 1.13%, more than double the 0.5% drop expected by economists consulted by the Reuters agency.

On Thursday, the Timely Indicator of Economic Activity (IOAE), published by the National Institute of Statistics and Geography (Inegi) of Mexico, had no variation in September, compared to the previous month.

This trend points to a stagnation.

Meanwhile, in Chile, a similar index shows that the economy is slowing down.

While forecasts for the region have generally turned more pessimistic, Colombia and Peru surprised with higher-than-expected economic activity in recent weeks.

"Growth momentum is currently positive," economists from the International Monetary Fund (IMF) wrote in a publication focused on Latin America.

“But financing is becoming scarcer and more expensive as major central banks raise interest rates to control inflation.

Capital inflows to emerging markets are slowing and external borrowing costs are rising.

Internal interest rates in emerging markets are also increasing because their central banks are also raising them to combat inflation, but also due to the reduction in investors' appetite for risky assets," Santiago Acosta pointed out in the text. -Ormaechea, Gustavo Adler, Ilan Goldfajn and Anna Ivanova.

The analysis firm Focus Economics forecasts that the region's Gross Domestic Product (GDP) will grow 2.9% this year and lose strength in 2023, affected by geopolitical tension between Russia and the West, financial conditions and a weakening of one of the main export markets, China.

For his part, the specialist Benito Berber, chief economist for Latin America at the Swiss bank Natixis, agrees with this point of view.

“Most of the region's monthly GDP indices posted negative monthly growth rates in recent months,” Berber wrote in his report to clients this week.

"This is an important development because growth had been very resilient in the first half... the winds of a global recession have started to blow."

Market strategist Luciano Rostagno of Mizuho bank warned that the upward trend of recent months "is over or is about to end and that the region will lose significant momentum in the coming quarters," in an email.

While some Latin American economies have been resilient to the ongoing global economic slowdown, Rostagno argues that the trend is unlikely to continue.

“Most of the cyclical recoveries from the pandemic-induced downturn are now behind us.

Furthermore, lower terms of trade and tighter financial conditions are expected to exert a significant downward momentum on economic growth,” he added.

In Chile, the interest rate reached 11.25%, its highest level since 1998, which has slowed down the economy.

In addition, fiscal consolidation efforts and political uncertainty surrounding the constitutional convention have added pressure.

Mizuho predicts a contraction of 0.5% in 2023 in Chile.

This year, the political tension is perhaps strongest in Brazil, where elections will be defined at the end of the month if President Jair Bolsonaro continues in power or a change of government with former left-wing president Luiz Inácio Lula da Silva.

Mizuho estimates that Latin America's largest economy will grow just 0.8% this year, due to the sharp rise in interest rates.

The latest inflation records suggest that monetary policy has worked, as it is starting to come down.

“Brazil's economic growth remains one of the weakest in the region this year and in 2023,” says a Focus Economics forecast report, “Private consumption and exports are emerging as the main drivers of growth, while the political uncertainty in the aftermath of the elections and a potentially strong increase in public spending are key factors to watch”, pointed out the firm's specialists.

Argentina will also face a recession next year, Mizuho's Rostagno predicts, as Economy Minister Sergio Massa has announced the implementation of austere policies to avoid a default.

“While the region's high levels of international reserves and strong central bank credibility will help mitigate the impact of tighter financial conditions, rising borrowing costs will strain public finances through higher loan payments. interest, since public debt and financing needs continue to be high”, assures the IMF.

"Given the pressing social needs of the region, policies to reduce debt and deficits can only be effective and long-lasting if they are inclusive, that is, if they protect the poor," the Fund's economists point out.

“Even where fiscal space exists, fiscal policy must also go hand in hand with monetary policy, focusing on supporting vulnerable groups, especially as high inflation persists and growth weakens, but without boosting domestic demand.

This will require careful calibration to offset spending measures to protect the poor.”

Source: elparis

All business articles on 2022-10-21

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