NEW YORK — Latin America’s biggest economies will most likely face a modest growth and high inflation in the next two years, increasing the risk of disruptive social and political scarring, economists at Goldman Sachs said.

In a 58-page report, analysts Alberto Ramos, Sergio Armella and Daniel Moreno warn that the region’s macro outlook will be shaped and conditioned by “endemic low” investment and savings as well as high macro and policy/political uncertainty.

A projected growth of only 2% of the gross domestic product for 2022 is the highlight of the unappealing outlook for the world’s most unequal region. “LatAm seems bound to return in 2022 to the path of low/modest growth it was treading pre-pandemic,” the analysts said in the note, flagging the negative effects of inflation, hawkish monetary policy forecasts and political risk.

After growing an expected 6.6% this year, the region will be constrained next year by a “rapidly diminishing marginal returns from reopening” from COVID, a high inflation, policy tightening and softer external impulse to growth. In the projection, Colombia is the only economy to break the 4% growth threshold in 2022, with Ecuador and Peru the only other economies expected to deliver growth rates above 3%.

And the environment of persistent modest growth and slow socioeconomic progress in the region “increases the risk of disruptive social and political scarring,” they said in the analysis published November 9.

Bearish

Goldman’s Latin America outlook is more bearish than consensus and below as well the 3% of economic expansion estimated for 2022 by the International Monetary Fund in its most recent regional economic outlook, published on October 21.

“LatAm continues to be challenged to build the foundations for robust, sustainable socially-inclusive growth. We are not optimistic that this will be achieved in 2022-23,” the analysts said.

They cite a backdrop of high political and policy uncertainty given a heavy calendar of political events: polarizing presidential elections in Chile, Colombia, and Brazil, mid-term congressional elections in Argentina, and the uncertain process of drafting of a new constitution in Chile, to be submitted to a popular plebiscite at some time during 2H2022.

In the other hand, inflation will most likely peak in the last quarter of 2021 to a multi-year high to moderate gradually but to remain above target throughout 2022, according to the report. The cost of living in Argentina, Brazil, Chile, Colombia, Ecuador, Mexico and Peru is forecasted to moderate from a cyclical high of 12.6% this year to a “still high very uncomfortable” 9.6% next year, driven mainly by the very high-inflation environment in Argentina, the report said.

The Outlook

Brazil’s economy will endure a sizable deceleration from little less than 5% grow this year to below 1% in 2022, given a backdrop of high inflation a quick shift to a significantly restrictive monetary stance by end of this year and rising fiscal and political risk-premia “ahead of a likely highly polarized” national election in the last quarter of next year.

Mexico’s GDP is projected to decelerate to below 3% in 2022 driven by rising rates, softer U.S. demand and “overall difficult business and regulatory environment.”

Argentina’s economy is expected to continue facing headwinds from rising macro and financial imbalances, growing micro distortions such as price controls, and weak policy credibility. “Reaching an agreement with the IMF, to reprofile large debt amortizations in the next 2-3 years, remains an open issue with difficult and uncertain resolution,” according to the analysts.

Presidential elections in Colombia and Chile and a significant fiscal drag “are likely to keep investment spending and growth subdued” in both nations “until domestic economic agents and foreign investors have more clarity on policy direction.”

In Peru, uncertainty with regard to overall governability conditions and the policy mix of the leftist Castillo administration, “alongside higher inflation and rates are expected to lead to a visible growth slowdown in 2022.” While in Ecuador the economic growth will remain in the low 3% supported by easier fiscal and external funding constraint supported by the IMF program. “However, governability and policy implementation conditions remain weak and unstable and the risk of social unrest moderate/high,” the analysts said.

Venezuela is set to “remain trapped in a seemingly never-ending economic depression and hyperinflationary spiral”. The nation’s economy has been contracting uninterruptedly since 2014: real GDP is estimated to have declined by 77% during 2014-20, and is expected to decline further during 2021-22.

“Venezuela is experiencing one of the worst peace-time economic downfalls in modern history, with the contraction of real GDP far exceeding that of the United States during the Great Depression (-28%), of Spain during the Spanish Civil War (-28%) and of Greece during the more recent crisis (-27%),” the report concludes.