Latin America's economic growth surprised positively this year with an estimated increase of more than 2%, but as is usual with any average, this figure obscures the differences that the two largest economies have compared to the others. The year 2023 will be remembered for the El Niño phenomenon, which brought the worst drought since 1944, as well as the inability of some countries to contain inflation and the impact of ongoing social unrest that has plagued the region.
The fact that the increase in regional gross domestic product (GDP) was stronger than expected is largely due to the fact that expectations were very low. The World Bank (WB) noted in its latest report that the region has managed external shocks such as the war in Ukraine better than expected. But momentum remains weak and the region will experience the least growth in the world. For a territory whose total population has increased by almost five million people this year, according to the Economic Commission for Latin America and the Caribbean (ECLAC), this growth is not enough to reduce poverty and create enough jobs.
According to the International Monetary Fund (IMF), the countries that stand out for their high growth rates estimated for this year are Panama with 6%, Paraguay with 4.5% and Costa Rica with 4.4%. However, due to their size, these small economies have a lower weight in the regional average. Growth in Brazil and Mexico, estimated at 3.1% and 3.2% respectively, is the impetus that explains the regional average of 2% for this year. On the other side of the spectrum are Argentina with an expected decline of -2.5% and Chile with -0.5%. According to the World Meteorological Organization (WMO), these countries, as well as parts of Brazil, Bolivia and Uruguay, suffered the worst drought since 1944.
The data for the third quarter of this year even suggests a slowdown. Annual GDP growth slowed to 1.8% in the third quarter from 1.9% in the second quarter, due to weaker growth in Brazil and declines in Colombia and Peru, analysts at Washington-based FocusEconomics wrote. Barcelona, in its latest report. “Argentina's economy also contracted, although slightly more modestly than in the second quarter, as the impact of a devastating drought eased, while Chile returned to growth thanks to a stronger mining sector,” the company noted.
The 2023 drought caused by the El Niño weather phenomenon was so severe that countries in the southern tip that rely on the export of agricultural products suffered heavy losses. In a new agreement reached this year between the IMF and the Argentine government, the drought was a factor in testing the country's ability to pay interest rates. “In politics, Javier Milei's recent election victory in Argentina heralds a shift towards more market-friendly policies, even if the ability to govern could be a challenge,” they said. FocusEconomics estimates a further -1.4% decline in 2024 and a 2.7% recovery in 2025.
Inflation has been a persistent problem this year for Colombia, where the IMF forecasts a -1.4% contraction this year. While the rest of its major peer economies were able to lower their interest rates as annual inflation began to decline, the cost of living in Colombia rose by 10.5%, according to the latest data. “Domestic demand growth slowed amid double-digit inflation and the highest interest rates since the 1990s,” FocusEconomics noted. This year the country also faced the risk of President Gustavo Petro implementing ambitious reforms of, among other things, the pension system, which were reflected in the price of its government bonds. This risk appears to have decreased. According to the IMF, Colombia will grow by 2% in 2024.
Ongoing social unrest in Peru, a country that has been mired in intermittent political crises since 2019, has likely pushed the country into recession this year, analysts at credit risk firm Fitch said in their latest report. President Dina Boluarte and Congress lack popular support, leading to sporadic social protests that paralyzed the streets.
“We believe that given the governance challenges since he took office [la presidenta Dina] Boluarte will likely face challenges in passing key reforms in the fractured Congress,” analysts warned. “Instability is weighing on growth: we now expect growth of just 0.3% in 2023, compared to 1.8% in our last report on April 28, 2023,” they added.
“In 2024, Latin America’s economic growth will remain well below the global average due to ongoing political uncertainty and a general lack of economic competitiveness compared to other emerging markets,” FocusEconomics wrote. “Investments related to nearshoring, interest rate cuts and inflation will have a supportive effect,” write the economists. Mexico stands to benefit most from nearshoring, the trend in which companies move operations out of China to reduce geopolitical risks.
Although there will be lower inflation and lower interest rates, the company expects growth to be similar to this year. The company expects the region's GDP to grow by 1.6% in 2024 and 2.3% in 2025.
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