WorldLatin America divides into two rhythms of economic recovery

Latin America divides into two rhythms of economic recovery



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From rigid confinements, Latin American countries moved to intermittent restrictions, forcing the passage of a new economic normality. The region suffered the death of one and a half million people by covid-19, while poverty increased, inflation rose, work changed and, with it, the perspective of the future. It is in this context that the economic recovery takes place, different in each country, but with a common denominator: the positive impact of fiscal stimuli implemented by governments.

September brought the Gross Domestic Product (GDP) data for the second quarter of the year, which allows us to portray the recovery of economies compared to their pre-pandemic levels. The results show: those who invested in fiscal stimulus to help the unemployed population are at the forefront. Those that didn’t, however, not only fell behind, they also missed potential growth in the future, experts consulted say.

“We are exactly one year after the start of the recovery process,” says Alfredo Coutino, an analyst specializing in the region at Moody’s Analytics. Most Latin American countries started their economic ascent in the third quarter of last year, and in July most of the region gave the green light to reopen their economies. “And what we see is that there are two groups of countries: in the first are Chile, Brazil and Peru, already with a GDP level close to what they had before the pandemic. In the second group are the most backward countries, including Mexico and Colombia”. The GDP of Brazil, Chile, Mexico and Argentina, combined, represents 66% of the region’s total GDP.

What the three winning countries have in common, says Eugenio Sánchez, an economist and data analyst, is that they have invested a great deal of resources in fiscal stimulus. Elements that were spent through a combination of programs, direct transfers to the poorest families, loans to companies, tax breaks and unemployment benefits—this, in particular, a strategy that allowed employees to return to work normally during the reopening. , preserving the company-employee relationship.

“It’s worth understanding what the determinants of long-term growth are, which in this case is the workforce,” says Sánchez by telephone from London. “People incorporated into the labor market and accumulated capital together determine a country’s installed production capacity and, therefore, its long-term growth. So, when there is a situation like the pandemic, where we force the economy to stop to achieve social distance and force people to stay at home, it is possible to see the destruction of capital”.

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Among Latin America’s largest economies, Mexico is the country that least targeted additional spending measures as a percentage of GDP. According to the International Monetary Fund (IMF), Mexico spent 0.7% of GDP on additional measures to contain the damage of the pandemic and refused to make tax exemptions. Meanwhile, Chile earmarked 14%, Brazil 9.2%, Peru 7.8%, Colombia 4.7% and Argentina 4.5%. Chile, for example, spent a lot of resources on unemployment insurance and partially subsidized the payroll to prevent companies from going out of business and jobs from being lost. Brazil also increased public spending. The result of this is faster recovery.

‘Too much’ caution

“Mexico is lucky to have such a big economy and to have, on the side, the United States implementing such a big stimulus. However, Mexico would be better off if the government had implemented a greater fiscal stimulus”, says Luciano Rostagno, Latin America market strategist at Banco Mizuho do Brasil. US officials declined during the week to forecast growth for this year from 7% to 5.9%. “Mexico was too cautious in its spending, so the economy is suffering from the pandemic.”

The consequences of this decision are already seen in recent data, but will also be seen in the future. “The country has lost potential growth,” adds Rostagno, referring to the estimate of how much an economy can grow without suffering inflation problems, “and the reason for this is that it did not act to cushion the shock of the pandemic. This affected the business sentiment, the postponement of investments and the loss of the potential growth rate”.

Protests and Inflation

Colombia’s state support program boosted the economy until massive protests erupted that turned violent and cost dozens of lives. The disruptions generated, considering that the protests lasted for months, impacted the country’s economy, experts say. Argentina, in turn, has inflation above 50% in the last 12 months, which has limited the country’s growth.

“Argentina continues to have the same structural problems for 3 years”, says Coutino, “they have been in recession since then and the country started a process of recovery after the pandemic, in the third quarter of last year, but it was more due to an arithmetic backlash than it took place in practically every economy in the world”.

The future

It is clear that there is important positive growth in Latin America this year, says Coutino. “Now where are you moving? Our projections allow us to anticipate that after the 2021 economic recovery, Latin America is already heading towards a phase of economic expansion”. Chile, Brazil and Peru will continue to grow this year above where their GDP level was before the pandemic, while other economies such as Mexico and Colombia could expand beyond the pre-pandemic level in 2022.

High inflation expectations around the world have caused some central banks to raise their interest rates. “We hope this will support the region’s currencies in the near term,” says Rostagno, “but from a longer-term perspective, the policy will continue to be a headwind.” The region faces an intense election season this and next year, and the pandemic has heightened discontent with governments. “This increases the risk of populist policies,” says Rostagno, “Argentina, Chile and Colombia are next to have challenging elections ahead. In Brazil, there is still a year to go before the general elections, which gives time to improve” in terms of political uncertainty.

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