Growth in Latin America will soften in the second half of 2023

Latin America’s six largest economies have put in mixed performances in terms of GDP growth this year. Brazil and Mexico have proven more resilient to high inflation and interest rates than we had initially expected, the former buoyed by a bumper harvest and the latter by stronger than expected US demand for its exports. However, Argentina, Chile, Colombia and Peru have all fared worse, reflecting a drought-related hit to agriculture (Argentina) and to mining (Chile), as well as political difficulties. Political instability will continue to weigh on Peru’s outlook, as localised protests will affect mining operations. Momentum from private consumption gave Colombia’s economy some resilience initially, but private investment has plummeted as the business environment has weakened under the leftist president, Gustavo Petro. 

Inflation is easing in most countries, other than Argentina, which is at risk of hyperinflation. Monetary easing has begun in Brazil and Chile, and we expect Colombia, Peru and Mexico to follow suit soon. Nonetheless, weaker US and global growth will act as headwinds in the short term, and the effects of Brazil’s bumper harvest will wear off too. We expect Latin America to grow by 1.9% in 2023 as a whole. Although this is hardly a stellar performance compared with other emerging markets, it is more than half a percentage point more than we expected six months ago. As monetary easing and disinflation continue into 2024, we expect regional growth to pick up. However, as the US and global economy will recover only modestly, we expect Latin America to grow by just 2%. 

Looming elections in Argentina and Ecuador, and in Mexico in June 2024, will have a bearing on the economic outlook. Following a surprise victory for a far-right populist, Javier Milei, in Argentina’s primary elections, uncertainty over who will take over as president is rising. The government devalued the currency on August 14th, but devaluation pressures are still high. We expect monthly inflation to hit the double digits in August and September: Argentina is flirting with hyperinflation amid depleted foreign reserves. With the economy in a precarious state, whoever wins the election will face a huge challenge. Meanwhile, Ecuador’s snap presidential election has been rocked by the assassination of a candidate, and much is at stake as policymakers struggle with fiscal and financing challenges, with IMF support. In contrast, Mexico’s outlook is rosier and steadier, underpinned by US nearshoring demand. We expect that whoever emerges as the candidate for the ruling Movimiento Regeneración Nacional (Morena) will win next June. Claudia Sheinbaum, the front-runner, would adhere more closely to the current president’s statist policies, whereas her Morena rival, Marcelo Ebrard, is more market-oriented. Victory for the centre-right opposition alliance cannot be ruled out. 

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