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Latin America Could Experience Economic Stagnation in 2023

The region’s results in 2022 were better than predicted by ECLAC and the OECD. However, it is thought that Latin America could present stagnation in its economy in 2023. And the most affected would be the large economies, such as Brazil, Mexico, Colombia and Argentina. 

2022: A year with moderate growth 

It was believed that, as a whole, Latin America could present stagnation in its economy in the year that ends; but, the region’s performance in 2022 was better than expected despite the complicated world outlook.

This is according to a statement from the ECLAC (Economic Commission for Latin America and the Caribbean), an organization that reported that the year 2022 would be closing with a growth of 3.2%. This percentage is even higher than what had been estimated in April of this same year when it was thought that it would be close to 2.5%.

Also for the OECD (Organization for Economic Cooperation and Development) the region surprisingly exceeded expectations although growth is considered moderate. Among other factors, the increase in demand for raw materials and, therefore, an increase in exports, contributed to this situation.

However, despite positive news, the growth of America is far below the 6.9% reported in 2021 by the World Bank. So this news has to be taken with tweezers: it is better than expected, but it is also less than the previous one.

Latin American economy: possible stagnation in 2023

Now, the question is: will there be a change in the trend? Apparently, according to world organizations, this situation will not stop, nor will it be reversed, but the decline in the growth of the Latin American economy will continue, predicting a possible stagnation in 2023, with a growth of only 1.4%.

The situation would be practically the same, without major differences country by country. Although some will feel the impact more than others. In this regard, it is thought that the growth of GDP will be lower than in 2022 in the large economies of the region: Brazil, Mexico, Argentina, Colombia, Chile and Peru. 

All of them could perform worse than the global economy as a whole, whose overall growth would be 2.7%. In particular, the IMF forecasts that Brazil will increase only 1.0% in 2023, while for Mexico the predictions point to 1.2% in the same period.

On the other hand, the economies that would suffer the greatest slowdown would be those of Colombia and Argentina, rising from 8.1% and 4.4% to 1.2% and 0.5%, respectively. Meanwhile, Chile will also fall by up to 0.5%. The only economy that seems to remain practically stable would be Peru: 2.7% in 2022 and 2.6% in 2023.

Factors that could affect

It is considered that there are various factors that could affect Latin America to present a situation of stagnation in its economy in 2023. First and foremost, it should be noted that this is a symptom of a larger problem since there is not a good global outlook: inflation has risen to levels not seen in decades, which is slowing growth in the world.

Such a situation has forced governments to take measures that can be drastic, like increasing interest rates. While this is expected to help fight against the problem, it may take time; moreover, such measures also affect investment and consumption, which is reflected, of course, in growth.

Secondly, according to estimates, Asia would be the main driver of growth in 2023, while the situation would not be so favorable in Europe and the United States, where a sharp slowdown is expected; precisely, these are two of the main partners, with whom the countries of South America have the great commercial exchange.

Thirdly, the OECD foresees a tightening of financial conditions, as well as the withdrawal of many fiscal aids and a decrease in commodity prices; and although in its Economic outlook, this organization does not include a forecast for Latin America, there is no doubt that these trends will have an impact on the region, further complicating the dynamics of their economies.

Similarly, the consequences of the armed conflict between Russia and Ukraine, related to the energy issue, have negatively affected the rest of Europe and, then, global growth. 

In the fiscal field, even public debt levels are high in the countries of the region; in fact, the ratio of external debt to GNI reached 40.8% in 2020. In this context, the demands for public spending are strong. 

Finally, in terms of the factors that may influence the possible stagnation of Latin America’s economy in 2023, there is greater risk aversion and restrictive monetary policies, which reduce capital flows to emerging markets.

The only potentially good news for 2023 is that China may grow by more than 4%, above the expected global average (which is 2.7%, as noted). Indeed, Asia’s major emerging economies are expected to account for the lion’s share of global GDP growth.

This could be encouraging for some Latin American countries, which have a significant volume of business with the Asian giant. In particular, Brazil, Peru and Uruguay allocate more than 30% of their merchandise exports to China; and Chile up to 40%. 

Some measures to take

The increase in prices affects the decrease in purchasing power, and this becomes even more noticeable in the lower-income population. Therefore, the recommendation of international organizations dealing with the economy is to fight inflation, as a top priority.

Similarly, fiscal policy should go hand in hand with monetary policy, without increasing the public debt burden. Although low-income countries have a high risk of over-indebtedness or are already in such a situation, and now the financing conditions are more complicated. 

It is also fundamental addressing food security, since all these situations, related to high prices, affect the supply chain and affordability of food, and the most vulnerable people are those who face the greatest risk. Therefore, markets should be kept open and access to basic products should be guaranteed, as well as timely assistance.Despite all this panorama, it is expected that the measures will have an effect. For the time being, it is thought that there will be a slight rebound in Latin America, where moderate economic growth of 2.4% is forecast for 2024.

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