By: Staff Writer
November 4, 2022
The International Monetary Fund (IMF) warns that growth will “decelerate in 2022 from 3.5 percent to 1.7 percent” as downside risks “dominate” the regional outlook.
Nigel Chalk deputy director in the IMF’s Western Hemisphere Department, said ahead of the release of the Latin American and Caribbean regional economic outlook that the region was subject to two distinctive shocks, the first being the COVID-19 pandemic and now the Russian invasion of the Ukraine.
He added: “As a result, the region contracted very sharply in 2020, but then binds back pretty strongly in 2021 and 2022. They were helped by the global recovery, a normalization of service sectors as the COVID pandemic waned and booming commodity prices.”
Through it all coming out of the brunt of the pandemic, Mr Chalk said, “Amid the strong demand rebound from COVID pandemic related disruptions, high commodity prices, and inflationary pressures in general emerged in 2021. Russia’s war in Ukraine has exacerbated these inflationary problems. Monetary authorities in the region responded very quickly, they moved well ahead of others in the world to contain price pressures.”
Inflation is still “very high” across the region. The Inter-American Development Bank pegged the LAC average to be above 9 percent for 2022. This trend remained for the duration of 2021 and now into 2022 and will likely remain for 2023.
To tamp down on U.S. inflation the U.S. Federal Reserve voted unanimously to raise the interest rate paid on reserve balances to 3.15 percent, effective this past September. If inflation pressures persist, we may see another rate increase for the U.S., which means considerable pressure for LAC economies as the U.S. dollar becomes scarcer and Americans have less disposable income to travel for vacation, putting the tourism industries in several Caribbean countries at risk.
Mr Chalk also noted: “Now the global environment is again shifting. A third global shock faces the region, as systemic economies raise their policy rates and global financial conditions tighten.
“This, in turn, is leading the engines of growth for the world economy to slow. We see that in China in Europe in the US, and it’s leading commodity prices to soften and it’s these forces that will shape the prospects for the region in the coming year.
“We expect growth to decelerate throughout Latin America and the Caribbean, going from 3.5 percent this year to 1.7 percent next year, and downside risks dominate the outlook.”
On top of this he added, inflation can become more “persistent” forcing central banks around the region to become more forceful in their attempts to control it.
For most Caribbean economies that are on a fixed exchange with the U.S. dollar, very little can be done from a monetary perspective as these countries typically import inflation and monetary policy is ineffective with regard to softening price increases.
Some of the Central America countries, like Costa Rica, have opted to raise interest rates to tamp down on the inflationary pressure.
Regardless it is going to be a bleak new year if the IMF’s forecast rings true, but on the bright side, all we have is up to go from here on in.