The International Monetary Fund (IMF) says the economies of Latin America and the Caribbean have continued their strong post-pandemic rebound, but “the winds are shifting” as global financial conditions tighten, commodity prices reverse upward trend, and inflationary pressures persist.
The Washington-based financial institution on Wednesday said the reopening of contact-intensive sectors, especially hospitality and travel, the unwinding of pandemic “pent-up” demand and still favorable external financial conditions, supported a solid expansion in the first half of the year, allowing services to “catch up” with manufacturing and employment to reach pre-pandemic levels.
The bank said year-on-year growth reached 2.8 percent in the first quarter, compared to an average of 1.7 percent in the years preceding the pandemic, and that high-frequency indicators point to continued momentum in the second quarter.
On the back of this “solid” first half of the year, and despite an expected slowdown in the second half, the IMF forecast the region to grow by 3.0 percent this year, an upgrade from its April forecast of 2.5 percent.
But it said the region faces “significant challenges,” including tightening global financial conditions, lower global growth, persistent inflation, and increasing social tensions amid growing food and energy insecurity.
“These factors contribute to our downgrade in growth to 2.0 percent in 2023, 0.5 percentage point lower than anticipated in April,” the IMF said.
It said the strength of the post-pandemic recoveries has varied across the region.
The IMF said the global rebound of commodity prices from the pandemic lows, further boosted by the war in Ukraine, has generally supported the recovery of commodity exporters (some South American economies), while constraining those that depend more on commodity imports (Central America and tourism-dependent Caribbean economies).
“The upward trend of commodity prices seems to be reversing, as the global financial conditions tighten,” the bank said.
It said among the largest economies, Chile and Colombia have seen a particularly “dynamic rebound, propelled by strong growth in services, in part due to the fiscal stimulus in late 2021, while Mexico’s economic output is yet to regain its pre-pandemic level as services and construction continue lagging.”
The IMF said Caribbean economies are also “behind in their recovery, as tourism is yet to return to pre-pandemic levels, despite the recent rebound.”
Meanwhile, it said Central America, Panama and the Dominican Republic have already surpassed their pre-pandemic output levels, driven by the rapid recovery in the United States, “through strong exports and remittances inflows, as well as supportive policies.”
The IMF said inflation, on the other hand, has accelerated throughout the region, amid rebounding domestic demand, lingering supply chain disruptions and rising commodity prices.
It said central banks have “appropriately tightened monetary policy to contain second-round effects and anchor longer-term inflation expectations.”
“But inflation could prove persistent in the wake of compounding shocks and broadening price pressures,” the IMF warned.
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