Home Research IMF IMF Sees Latin America GDP Growing 6.3% This Year; Says Recovery Still Far From Complete

IMF Sees Latin America GDP Growing 6.3% This Year; Says Recovery Still Far From Complete

IMF Sees Latin America GDP Growing 6.3% This Year; Says Recovery Still Far From Complete

NEW YORK — The International Monetary Fund has just updated its regional economic outlook for Latin American and the Caribbean showing the subcontinent is still subject to forces that limit its recovery, including the removal of the extraordinary fiscal stimulus deployed to combat the COVID-19 pandemic.

Even with a projected economic growth at 6.3% for this year, the multilateral lender forecast a 3% expansion for next year, underscoring the necessity of not lowering the guard. “High frequency indicators suggest slowing growth momentum for some countries in the third quarter of 2021, while some contact-intensive sectors, such as hospitality and entertainment, continue to remain well below their pre-pandemic levels,” the IMF said in its REO released today in Washington.

The economic recovery registered so far “reflects a bounce back from the collapse in 2020 and is broad based, encompassing consumption, investment, and exports, offset by the increase in imports associated with the domestic demand rebound,” the report said. However, average real GDP and real GDP per capita are projected to exceed their pre-pandemic levels only in 2022 and 2023, respectively; while “employment is not projected to return to the pre-pandemic trend in the medium term,” the institution forecast in the study.

In short, “the recovery has been uneven and is far from complete,” the IMF said.


The report also shows that during the second quarter of the year quarterly real GDP reached pre-pandemic levels only in some of the Latin American countries. Private consumption “rebounded strongly” in Chile, Colombia and Peru, supported by fiscal transfers and allowance of pension withdrawals, while in Mexico “the recovery in consumption has been slow” due to scant fiscal support.

Meanwhile, the study makes clear that there is “significant heterogeneity” in investment in the region with stronger recovery momentum in Brazil and Peru. “Export performance has also been heterogeneous, and especially weak in Colombia and Peru,” according to the research note. “Strong remittances continue to provide a tailwind for Central America, while weak tourism demand poses strong headwinds for the Caribbean.”

“The short-term outlook is highly dependent on the evolution of the pandemic, commodity prices, global financial conditions, and the extent of pent-up private sector demand, as well as on a difficult balancing act between inflation and monetary policy,” the study said warning at some point that “risks to the outlook are tilted downward.”

The institution recommends that fiscal policy for the region “should allocate sufficient resources for health spending, including vaccination, and continue to support households and firms in a more targeted fashion while the pandemic persists.”

The IMF acknowledges that the monetary policy implemented by the main central banks has started to address inflationary pressures “but should continue to support economic activity insofar as the dynamics of inflation expectations permit.” If rising inflation threatens to de-anchor inflation expectations, central banks should tighten monetary policy to signal a commitment to inflation targets and avoid persistent increases in inflation.

“Supply-side policies should foster inclusive growth, including through progressive and growth-friendly tax reforms and measures to intensify climate change adaptation and mitigation,” according to the report.

Source: IMF Western Hemisphere Economic Outlook. October 21, 2021.

Short-Term Risks

Latin America and the Caribbean face downside external risks steaming from the emergence of more transmissible and deadlier COVID-19 variants, the IMF said. A tightening of global financial conditions “due to faster-than-anticipated monetary policy normalization in advanced economies or a sudden change in risk sentiment, which could trigger capital outflows and depreciate local currencies,” affecting growth.

Countries closely linked to the U.S. such as Mexico could also be impacted by a smaller fiscal package, while an escalation of trade and technology tensions, “could weigh on global investment and productivity growth with negative spillovers” to the region, the report said.


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