In resumption of activities after the most critical phase of the coronavirus pandemic, some Latin American countries used a common strategy: to reheat economies through government stimuli, especially with regard to the purchasing power of the population.
This is what explains, according to experts consulted by the CNN Brasil Business the upward revision of the Gross Domestic Product (GDP) of the Latin American region this year, released last Wednesday (19) by the Economic Commission for Latin America and the Caribbean (ECLAC).
According to forecasts by the entity linked to the United Nations (UN), Latin America’s GDP should grow by 3.2% — a more optimistic forecast than the one released last August, of 2.6%.
“Several economies in Latin America, after a prolonged period of pandemic, benefited from government stimulus, each in its own way, but especially through aid to the lower-income population”, explains Francisco Nobre, economist at XP.
“This boosted demand that had been pent up for a long time, with Latin American populations responding to these stimuli.”
Brazil is an example of this movement. The government measures put in place this year, such as the reduction of the tax on the Circulation of Goods and Services (ICMS) for fuels and the set of aids associated with the PEC of Benefits, helped to revive the economy, already stimulated by the resumption in the post-pandemic.
ECLAC revised upwards its forecast for growth of the Brazilian GDP, from 1.6% to 2.6%, largely due to this set of short-term measures that injected dynamism to the activity.
In the view of Lívio Ribeiro, a research associate at the Brazilian Institute of Economics at the Getulio Vargas Foundation (FGV-Ibre), Brazil’s performance has been a mainstay for the Latin American economy as a whole. “As Brazil is very large in the region, government stimuli here lead to an increase in short-term growth projections. Undoubtedly, the 2022 GDP revision is linked to the country’s performance”, he comments.
“The profusion of short-term measures, with aid, income transfers and exogenous downward shocks to inflation with tax change, increases the economy’s disposable income and makes for a ‘growth pocket’ in 2022. The magnitude of this was unexpected at the beginning of the year. We knew something was going to happen because of the electoral cycle, but we didn’t know the size and effect it would have.”
Another factor that justifies the upward revision of Latin American GDP is the performance of the commodity sector, affected by the war in Ukraine and the bottlenecks in production chains during the pandemic. “Until mid-April, shortly after the clash between Russians and Ukrainians took place, the impact that the rise in commodity prices would have on Latin America’s GDP was underestimated,” explains former World Bank vice president Otaviano Canuto.
“These forecasts from the beginning of the year took into account, above all, how the rise in energy and food prices would affect the purchasing power of people at the bottom of the pyramid, which was in fact very negative.”
With government stimulus acting on this front, the revenue collected from commodity exports had an effect on the Latin American region’s GDP, leading to an upward revision.
Lívio Ribeiro, however, warns of this interpretation: “Import prices also rose. It is necessary to look at the terms of trade, which is the relationship between imports and exports, to make a more complete analysis. The net commodity exporting economies have not gained income this year, they have lost it.”
Forecasts for 2023
The ECLAC report, while adding optimism to the performance of the Latin American economy in 2022, does not see the same good winds blowing in 2023, in line with other forecasts made by bodies such as the International Monetary Fund (IMF) and the World Bank.
According to the Commission, the pace of growth in Latin American economies is expected to slow to 1.4% next year, against a backdrop of possible global recession in which the cycles of monetary tightening underway around the world to contain the surge inflationary, will begin to have an effect.
“The central banks of Latin America, the United States and Europe are working on this more contractionary tune, in which the slowdown in economic activity is a necessary remedy to bring inflation back to the target”, comments Francisco Nobre, from XP.
“Here in Latin America, most central banks work with a target of 3%, but inflation has already reached 10% in some countries. In Chile, for example, it reached 14%, which is a very high level. So the bill for high interest rates will come at some point, and that time is next year.”
Specialists emphasize the fact that the slowdown is a global phenomenon, in which the tightening of monetary policies in the main economies of the world, such as the United States and Europe, necessarily impact developing countries. “This is the case of Mexico, for example, which, as one of the main trading partners of the United States, is one of the most impacted by the rise in interest rates”, says Nobre.
The performance of the Chinese economy, greatly affected by the Covid-zero policy of the Xi Jinping government, also has an impact on Latin American activity: “With the Chinese economy slowing down, countries here that maintain strong trade links with China also tend to slow down, especially Brazil, Peru and Chile.”
The effects of monetary tightening, however, are not the only problem to be faced in the coming year.
“We have the War in Ukraine, a possible stage of stagflation in Europe, energy shortages and price explosions in many sectors, including food. It is a global soup that indicates a very bad scenario for emerging countries in general”, says Lívio Ribeiro.
Speaking specifically of Brazil, which still faces additional uncertainties due to the presidential elections, the GDP forecast by ECLAC is around 1% for next year. “Regardless of who wins the dispute, the world is headwind, not tailwind”, summarizes Ribeiro.
Source: CNN Brasil

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