Latin American economies held up well last year despite shocks from Russia’s invasion of Ukraine and rising global interest rates. In 2022, the region’s economy expanded by nearly 4%, employment rebounded strongly, and the service sector rebounded from the pandemic.
Inflationary pressures are receding in many countries thanks to early and decisive efforts by central banks and lower global prices for food and energy. However, core inflation (inflation excluding food and energy) remains high at around 8% in Brazil, Mexico, and Chile (slightly higher in Colombia, but lower in Peru).
Despite this encouraging news on growth and inflation, 2023 is likely to be a difficult year for the region. Growth is expected to slow to just 2% this year due to rising interest rates and falling commodity prices. Job creation and consumer spending on goods and services have both slowed, and consumer and business confidence has declined. Growth will also be constrained by a slowdown in trading partners, particularly the US and the euro area. Furthermore, downside risks such as tighter-than-expected financial conditions and Russia’s war in Ukraine continue to dominate.
Moreover, bringing inflation back to the central bank’s target is likely to be a long process and could be subject to risks such as rising wage pressures.
difficult socio-economic outlook
Slower growth, high inflation and global uncertainty mean many people in the region are likely to experience a decline in living standards this year, leading to increased anxiety about the future.
Growing social discontent and declining trust in public institutions have been important trends in the region for some time. Social tensions have certainly worsened during the pandemic. The brunt of the economic impact was felt by the poor, especially those working in face-to-face services. Although government assistance was helpful, many people were unable to fully protect themselves from negative impacts, as evidenced by the marked increase in poverty. Increased food insecurity is also a key symptom of the pandemic’s lasting socio-economic impact.
The region’s middle class also faces more precarious economic conditions. Many small and medium-sized businesses suffered during the lockdown, and the ensuing price hike eroded middle-income earners’ wages.
Reversing these trends and the effects of the pandemic will require restoring macroeconomic stability and durably boosting growth through structural reforms. But finding common ground to pursue sensible economic reforms in an environment of significant social tensions will be an uphill battle. At the same time, unrest and political paralysis are likely to persist, eroding confidence and weighing on economic activity.
pave the way forward
Despite the obvious challenges, policies focus on ensuring economic stability, promoting growth and job creation, supporting entrepreneurship, and addressing the pressing social needs faced by many people in the region. You have to guess. This will help reduce social dissatisfaction and restore trust in public institutions. However, these actions require determination, persistence, and building social consensus across a range of issues.
- Central banks must not weaken their resolve to curb inflation, but this will require persistent efforts. Rate hikes are coming to an end in many regional economies, but rates will need to remain high for some time to ensure inflation returns to target.
- Fiscal policy needs to focus on social spending to support the poor while reducing public debt. Achieving these goals requires mobilizing revenue in a progressive, growth-friendly and equitable manner. Unless the wealthy pay their fair share of taxes, trust in government will continue to erode. Equally important is that governments prioritize spending prudently and pay attention to how to improve the credibility of public institutions. Emphasizing good governance and transparency is key.
- Building on recent advances, local safety nets must continue to improve to ensure reliable and sufficiently generous social assistance for those who need it most.
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These measures must not prevent the deeper policy changes needed to increase productivity, encourage investment and accelerate job creation. Over time, such reforms will become a major means of improving the living standards of local residents.