MercoPress. South Atlantic News Agency

Latin America's economy reported to be slowing down

“Monetary policies alone are not enough to face today's situation; fiscal spending must be targeted,” Cimoli explained

Latin America's Gross Domestic Product (GDP) has been reported to be slowing down, with a 2.7% expansion projected for the end of 2022, according to an Economic Commission for Latin America and the Caribbean (ECLAC) report released in Santiago on Tuesday.

The document claims the international scenario has become more complex due to the war in Ukraine and a domestic context of limited space for monetary and fiscal policy.

The United Nations agency also pointed out that private consumption remains the component of expenditure with the highest contribution to GDP growth, despite the decrease in its contribution.

“In a context of multiple objectives and increasing restrictions, it is necessary to coordinate macroeconomic policies that support the acceleration of growth, investment, and the reduction of poverty and inequality, while at the same time addressing inflationary dynamics,” said Mario Cimoli, ECLAC's interim executive secretary.

The economic slowdown is expected to entail growing unemployment, as high inflation deters investments and job creation, coupled with growing social demands.

The 2022 economic study projected that South America will grow by 2.6% (compared to 6.9% in 2021); Central America and Mexico by 2.5% (5.7% in 2021) and the Caribbean - the only sub-region that will grow more than in 2021 - by 4.7%, excluding Guyana (compared to 4.0% in the previous year).

The document also pointed out that the conflict in Ukraine had accelerated the rise in commodity prices, some of which have reached historic levels, while regionally it projected a 7% drop in projected trade.

Inflation has continued to rise, reaching a regional average of 8.4% by June 2022, more than double the average value recorded in the 2005-2019 period. At the subregional level, South America had the highest average inflation rate in June 2022 (8.8%), followed by Central America and Mexico (7.5%) and the English-speaking Caribbean (7.3%), with central banks increasing their monetary policy rates.

The slowdown in economic activity is restricting the recovery of labor markets, especially for women, the ECLAR report noted. While the male unemployment rate went from 10.4% at the end of the second quarter of 2020 to 6.9% at the end of the first quarter of 2022, female unemployment fell 2.1 % (from 12.1% to 10.0%). Likewise, at the end of the first quarter of 2022, the female labor participation rate (51.4%) lags behind the male participation rate (74.2%).

The ECLAC report also underlines the low growth in investment, which has become a structural constraint to development over the last three decades. Between 1951 and 1979, gross fixed capital formation (investment) in real terms grew by an average of 5.9% per year, while between 1990 and 2021 the average investment growth rate was only 2.9% per year.

ECLAC also made an urgent call to increase investment in Latin America and the Caribbean, which was at the lowest levels at the end of 2021 compared to other regions. To achieve this, greater coordination between fiscal, monetary, and exchange rate policy is needed, the agency stressed.

Cimoli explained Latin America was going through an “accumulated sum of events” that have been dragging on since 2008 and stressed that current inflation “does not mean that it is the same as that seen in the 1970s,” because “monetary policies alone are not enough to face today's situation; fiscal spending must be targeted.”