Latin America economic outlook | Deloitte Insights

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Introduction In Latin America, the economic cycle has shifted from booming growth toward greater uncertainty. GDP figures soared when economic activities reopened at the end of COVID-19–induced restrictions, and most economies regained their prepandemic sizes by the end of 2022, growing 7% in 2021 and 3.9% in 2022.1 Despite this expansion, several supply-side shocks in the world economy triggered inflation and prompted central banks to raise interest rates.

As a result, Latin America began contractionary monetary policy before most advanced economies. Now that price pressures are mostly under control, the consensus is that monetary tightening should ease as well. However, this current juncture—embodied by the contradictory states of the world’s two largest economies, the United States and China—requires complicated decision-making.

In the United States, the Fed achieved what seemed like a “soft landing”—that is, overall price inflation was under control while the economy continued to outperform long-term expectations. Nonetheless, the Fed maintained its benchmark rate around 5.25% to 5.5% at its latest meeting. This peak would mark the end of the tightening cycle, but it is unclear when the Fed will start lowering rates. The American economy should slow down in the second half of the year and the International Monetary Fund forecasts GDP growth to stand at 1.8% in 2023.2 A strong economy and a more expensive US dollar would affect emerging market currencies and lead to capital outflows seeking less risky assets in the United States.

Meanwhile, China is facing major economic difficulties. GDP growth did not get a boost from the relaxation of the zero–COVID-19 policy. As a result, Q2 results (6.3%) were below market expectations (7.3%). The IMF expects China to grow 5.2% in 2023, up from 3% in 2022—below the lofty average of 9% observed since 1978.3 Moreover, several structural factors could be undermining China’s growth potential. First, aging demographics will progressively shift spending toward elderly care.4 Second, foreign investors are more cautious now and might be attempting to relocate—or at least diversify—supply chains away from China. Finally, domestic investment has weakened because of a downturn in the housing market. Once believed to be on the fast track to the top spot in the world economy by the 2030s, current prospects suggest that China might become a near-peer of the United States 10 or 20 years later. This is expected to have a profound effect on Latin America since much of its growth depends on China, which serves both as a buyer of commodities and a supplier of goods and capital.

This report looks at some of the consequences of this divergence in Latin American economic performance. First, we analyze the effects of the Federal Reserve’s decision to keep its rates unchanged on Latin American monetary policy. Then, we dive into the implications of slower Chinese growth, as it starts tempering its demand for commodities, impacting the Latin American economies heavily reliant on trade with China.

With that in mind, we expect GDP growth in the region to reach 1.9% in 2023. Our forecast considers three main factors:

Weaking internal demand in the face of inflationExpansionary monetary policy possibly being less effective than expectedPossibly dwindling export revenue from China As for 2024, we expect growth to reach 2.1% on the back of a more stable inflation level, lower interest rates, and a favorable external sector (figure 1). The appendix has detailed forecasts for individual countries within the region.

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Source link : https://www2.deloitte.com/us/en/insights/economy/americas/latin-america-economic-outlook.html Author : Publish date : 2023-11-15 03:00:00 Copyright for syndicated content belongs to the linked Source .