Wednesday, June 12, 2024

ECONOMY | 29-04-2022 20:05

Ukraine war, rising prices prompt lower growth forecasts for Latin America

New United Nations report warns of lower growth in region this year; CEPAL sees 3% rise in Argentina’s GDP, while IMF predicts 4% jump.

Economic growth in Latin America and the Caribbean will be lower than expected at 1.8 percent this year due to the war in Ukraine, a UN body has predicted.

In 2021, the region's gross domestic product (GDP) was 6.2 percent, and the UN Economic Commission for Latin America and the Caribbean (ECLAC/CEPAL) in January forecast growth of 2.1 percent for 2022.

But in a statement Wednesday, it adjusted the figure downward, saying the war has heightened inflation, increasing financial volatility and costs.

"The economies of Latin America and the Caribbean face a complex juncture in 2022 due to the war between Russia and Ukraine, which ushers in a new source of uncertainty for the world economy," it said.

The economies of South America are projected by the UN body to grow by 1.5 percent, Central America and Mexico by 2.3 percent, and the Caribbean (excluding Guyana) by 4.7 percent, said the ECLAC.

"The war in Ukraine has also caused an increase in commodity prices, mainly in fossil fuels, some metals, food and fertilisers," it added.

Along with higher costs due to supply chain disruptions, the price increase has caused inflation in some countries to reach historic highs in 2022. As growth slows, the agency also warned of higher unemployment rates.

Last month, regional inflation was estimated at 7.5 percent, and many central banks anticipate sustained high inflation for the rest of the year. JP Morgan forecast this week that inflation in Argentina would hit 67 percent – well beyond the government’s forecast of between 38 to 48 percent. 

For Brazil, the region's largest economy, the ECLAC forecast growth of 0.4 percent for 2022.

Its projection for Mexico was 1.7 percent, for Argentina three percent, Venezuela five percent, Colombia 4.8 percent, Chile 1.5 percent, Peru 2.5 percent and Costa Rica 3.7 percent.

IMF projections

The International Monetary Fund’s latest forecast, issued this week, predicted that Latin America and the Caribbean's economy will grow 2.5 percent this year, also citing increased uncertainty over its outlook and boosted prices due to the war in Ukraine. 

Although the multilateral lender expects Brazil's economy to grow 0.8 percent, Mexico's by two percent, Colombia's by 5.8 percent, Chile's by 1.5 percent, Peru's by three percent and Argentina's by four percent this year, those rates are "very significant reductions relative to their prior year’s double-digit rates," IMF staff said.

By region, South America will grow 2.3 percent this year, the Fund said, with Central America, Panama and the Dominican Republic expecting 4.8 percent. 

For the Caribbean, the IMF distinguished between economies dependent on tourism, which were hard hit by the pandemic, with 3.2 percent, and commodity exporters (Guyana, Suriname and Trinidad and Tobago), with 20.2 percent.

"Even before the war, the region’s recovery from the growth-sapping pandemic was losing momentum," wrote the Fund's economists.

The impact is now being felt in higher food and energy prices, forcing countries to take measures "soften the blow on the most vulnerable and contain the risks of social unrest," the IMF said.

Several countries have moved to limit the impact on vulnerable groups in a host of ways, from "tax and import tariff reductions to price caps or social transfers."

About 40 percent of countries have introduced new measures, mostly on the tax side, "with an estimated average fiscal cost equal to 0.3 percent of gross domestic product," analysed the Fund.

Providing recommendations, the IMF said that governments should support low-income households and allow "domestic prices to adjust to international prices."

In addition to inflation, other risks lie ahead, said the report, citing a possible escalation of the war in Ukraine and rising interest rates in the United States, which could fuel an outflow of capital from a region in need of investment.

The authors of the blog — economists Santiago Acosta-Ormaechea, Ilan Goldfajn and Jorge Roldós — advocate protecting "spending on social programmes, health, education and public investment" while "implementing tax reforms."



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