Latin America is once again on track to grow more slowly than the rest of the world, with the regional economy set to underperform those of South Asia and even war-battered Eastern Europe this year, according to a new World Bank report.
(Bloomberg) — Latin America is once again on track to grow more slowly than the rest of the world, with the regional economy set to underperform those of South Asia and even war-battered Eastern Europe this year, according to a new World Bank report.
The region is now expected to grow 2% this year, the World Bank projects, an upgrade from its June estimate of 1.5% despite high interest rates, increased energy costs due to Russia’s war in Ukraine and a Chinese slowdown that threatens to dampen commodity prices. Employment, poverty and inequality indicators, meanwhile, continue to improve.
But even that rosier outlook sees the region growing at a pace insufficient to meet the needs of its poorest people or calm social tensions that have gripped nations large and small. And Latin America as a whole appears to have emerged from the pandemic in much the same place it entered it, the bank said.
“These growth rates are not collateral damage of the pandemic, but very similar to those of the decade of the 2010s,” when it was growing a full percentage point slower than the rest of the world, the report’s authors wrote.
The slow growth has reignited “long-unaddressed structural” issues, including low productivity and capital accumulation. The labor market remains firm, especially in countries like Brazil and Mexico, but the informal sector is growing and real wages are declining, according to the report.
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Foreign direct investment has increased in Brazil and Argentina. But there is “little evidence,” the World Bank said, that the region has taken advantage of global companies’ attempts to shift operations and supply chains closer to the US — a process known as nearshoring.
“Numbers to date, in terms of FDI, are roughly were they were 10 years ago, so despite all of the discussion over the last years we are not seeing huge inflows so far,” William Maloney, the World Bank’s chief economist for Latin America, said during a Wednesday news conference. “Mexico has seen an increase, but South America has not.”
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Across the Americas, governments are facing fiscal constraints that have contributed to the political struggles of recently-elected leaders. Consumer credit remains at record highs, testing the resilience of consumption that has served as a key driver of growth.
“Household income losses from the pandemic have not been fully recovered, especially for the middle class, and the social fabric remains stretched,” the bank said in the report.
Latin America’s growth outlook has improved in recent months in part because its central bankers were among the earliest to hike interest rates in the wake of the pandemic, and have been the first to start easing as fuel and food price pressures have cooled. That has boosted activity and improved forecasts across the region.
But it is now facing potentially significant global headwinds. China’s economic slowdown may be the largest, given Latin America’s reliance on commodity exports to the Asian giant. Falling demand and lower prices could pressure local currencies, reduce government revenues in nations with state-owned exporting companies and jeopardize foreign investment in a region where China accounts for 9% of inflows.
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Severe weather will also test Latin America’s economy. Central bankers are already sounding the alarm about the El Nino phenomenon, which will reach at least moderate strength in the second half of the year. Brazilian policymakers have debated the scale of the problem the region’s largest economy will face, while Peru’s are blaming it for weak growth.
The World Bank similarly warned nations to reassess their water infrastructure and reinforce vulnerable structures ahead of potential weather issues.
“Governments should implement a range of measures to address the challenges El Nino poses effectively,” it said.
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