Could the United States and China spoil Latin America’s rebound?

A slowdown in China and the end of US stimulus measures threaten a much-needed regional rebound.

Last year was marked by good news for Latin American economies. The region’s recovery has been stronger than expected and growth forecasts for the world Bank and IMF have improved over the past six months. Vaccination campaigns and fiscal support have sparked an economic rebound since the second half of last year, despite an apparent loss of momentum in the third quarter of this year.

But the future seems uncertain. Latin America is caught between two major global forces that threaten the region’s growth: a potential decline in capital flows from the United States as the pandemic stimulus wanes; and lower growth in China, where an energy crisis hits just as the country’s depleted property markets begin to reverse. To weather the storm, countries in the region will need to target fiscal support and signal that medium-term frameworks will be met, while doing what is necessary to ensure that a private sector recovery can offset policy contraction.

Even so far, the region’s recovery has been uneven and partial. This is largely due to differences in vaccination rates—75% of the population fully immunized in Uruguay, 5% in Nicaragua—and the ability and willingness to provide budget support. By the end of this year, the GDP of most countries in the region is expected to remain below 2019 levels, and no country expected to reach projected 2022 GDP levels before the pandemic.

AQ Nov 02, 2021 the results of the pandemic

The recovery was driven in part by strong GDP growth in the region’s major trading partners – the United States, China and Europe – as global financial conditions remained positive despite occasional backlashes. A commodity resurgence has cooled recently, with prices for some commodity groups having fallen or held steady, but overall terms of trade have improved for commodity-dependent countries in the region. According to monitoring by the Institute of International Finance (IIF), capital flows to Latin America rebounded this year, slowing in the second half.

But the global landscape looks set to turn more hostile as trends in the United States and China are expected to make things difficult for Latin American economies. A global rise in inflation, reflecting supply restrictions and labor constraints unlikely to resolve in the immediate future, makes interest rate hikes and an end to stimulus measures likely money for next year. Since late September, investor concerns about inflationary pressures in the United States have drives up yieldsreversing a decline in market interest rates.

Some fear that a change in monetary policy in the United States could trigger a repeat of the Taper Tantrum of 2013, when capital fled emerging markets. But capital flows to the region have not been so intense in the last few years. For most countries, favorable terms of trade and depressed domestic demand have led to reasonably comfortable external accounts. A repeat of 2013 seems unlikely, but domestic investment could fall if financial conditions deteriorate.

Meanwhile, China – the biggest buyer of much of Latin America’s exports – faces slowing growth as GDP-boosting activity in its property markets stagnates, in a recovery of its economic rebalancing after the 2008 financial crisis. The direct impact of the collapse of Evergrande, a highly indebted Chinese real estate company, and other real estate companies may remain mostly confined to the country, but the resulting macroeconomic downturn has already appeared in the last digits. China’s new pace of growth could impact both exports and commodity terms of trade for the region.

Latin American countries can do little to alter these global trends. How can they find their way there? The best option may simply be to focus on the home front. The pandemic’s legacy of higher public debt means that fiscal and financial support must become more selective, focusing on the most vulnerable businesses and workers. Countries in the region that generally have tight fiscal space (Brazil, Colombia and, to some extent, Mexico) will avoid new spending. Those still in more favorable territory, such as Chile and Peru, should still anticipate a tightening in external financial conditions ahead.

Limited policy space and social pressures exacerbate political risks, but cutting spending means relying heavily on the private sector to drive the recovery. Recent experiences in Mexico and Peru have illustrated how political uncertainty can dampen private investment. The region will have to count on greater efficiency, spending less while ensuring that the money goes to help the segments of the population most affected by the pandemic crisis.

In the longer term, attention should be paid to the fact that an incomplete economic recovery has generated weak labor markets, beset by Scars and “phantom” unemployment. Hence the relevance of implementing worker retraining and retraining policies. Like Carlos Felipe Jaramillo, Pepe Zhang and I have discussed recently, Latin America has already partly achieved high-income country status, but a significant portion of its population is highly vulnerable to economic shocks and natural disasters. The pandemic has made it clear that the region badly needs a vulnerability-based approach to understanding and addressing poverty.


Canuto is a Principal Investigator at Policy Center for the New Southnon-resident principal investigator at Brookings Institutionand director of Center for Macroeconomics and Development. He is a former vice president and former executive director of the World Bank, former executive director of the International Monetary Fund and former vice president of the Inter-American Development Bank. Contact: [email protected]

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