The specter of economic slowdown stalks Latin American countries in 2024. In its most recent report, the Bank of Spain warns that this year the region’s economies will advance at a slower pace compared to the previous year, going from a 2% to 1.3%. The downward forecast is based mainly on external risks: a more restrictive monetary policy in the United States and a greater slowdown in the Chinese economy: “It is estimated that a temporary slowdown in economic activity in China of 1 percentage point would reduce in 2024 the GDP level will be 0.7% in the region,” details the report on the Latin American economy. The Spanish central bank also warns of a greater economic disaster in Argentina. However, in the medium term, regional growth prospects stand at 2%.
The Bank of Spain states that within the countries, the main risk for the region’s economic activity would come from a slower than expected decrease in inflation in the event of more restrictive monetary policies. “Real interest rates are expected to maintain a restrictive tone of monetary policy until the end of 2024, given that the anticipated rate cuts would not be of much greater magnitude than the expected reductions in inflation, especially in Colombia and Mexico”, abounds.
Hand in hand with a reduction in price escalation, the Bank of Spain specifies that the majority of Latin American central banks have begun a cycle of monetary relaxation. “In the second half of 2023, the central banks of Brazil, Chile, Colombia and Peru reduced their official interest rates. Financial markets anticipate that there will be more declines in the coming quarters and that the central bank of Mexico will join this cycle of monetary relaxation in the first quarter of 2024,” the institution predicts.
Although inflation in Latin American countries has been declining to stand, on average, at 5% at the end of 2023, the Bank of Mexico warns that the rise in food and energy prices continues to be an issue. of concern: “The prospects for stabilization of the prices of food raw materials, together with the more recent increase or stabilization of energy prices, will probably lead to a slowdown of the disinflation process in the region,” he says.
The Bank of Spain highlights the general increase in the vulnerability of public finances, derived from high levels of public debt and structural deficits. Added to this are the adverse dynamics expected for debt interest payments, the low observed—and expected—growth rates, and the existing uncertainties regarding the effective application of fiscal rule frameworks. In Argentina, specifically, the institution mentions that the risks outlined in 2024 may be aggravated by a weaker economy and greater market volatility. In this country, there is a greater liquidity risk in entities due to greater volatility of deposits in pesos and a shortening of their terms.
Among the potential economic strengths of Latin America, the region points to the relocation of companies through the so-called nearshoring and friendshoring and, in particular, those that have high integration in global value chains and a strong manufacturing sector. Optimism for this new industrial trend, the report details, can be seen in countries like Mexico, where economic activity continues to rise.
Another point in favor for Latin American economies lies in the moderation of social and political conflicts, after a turbulent first half of 2023. “After reaching local highs in some countries—after the assault on Congress in Brazil, the dismissal of President Castillo in Peru and the crisis unleashed in Colombia over the financing of the president’s candidacy—political and social tensions calmed down to reach levels below those at the beginning of 2022, with the exceptions of Argentina and Chile. This new context of lower tensions could contribute to a somewhat more favorable climate for the approval of structural reforms that help increase potential growth,” he concludes.
The Bank of Spain’s forecasts are in line with the calculations of the International Monetary Fund (IMF) for this year in the region. In its most recent annual report, the multilateral organization reduced its forecast for the regional Gross Domestic Product (GDP) from the 2.3% estimated in October of last year to 1.9%. The IMF changed its calculations in Latin America downwards due to the setback that the Argentine economy is currently suffering.