And Latin America, how are we doing?

The year 2021 was one of recovery after the economic and health crisis. Most governments have followed spending policies since the mid-2020s to cushion the downturn and shore up the recovery. Although almost all countries followed Keynesian macroeconomic prescriptions, the intensity and effects in each country varied. How is the recovery going in Latin America, and what to expect for the region?

In 2021, according to IMF data, the Latin American recovery was characterised by inequality: the countries of the Pacific Alliance had the best recovery with an average growth of 8. 7% of GDP, led by Chile and Peru with increases of 11% and 10% per year, respectively; the Mercosur countries grew by an average of 5% with Argentina and Brazil leading the way; Caricom was the most irregular market, with a 6% drop in Saint Vincent and the Grenadines and 20% growth in Guyana, although the Caribbean average was 2% per year; Central America grew by 6.7%, with Panama and El Salvador being the most dynamic countries.

The uneven recovery is due, in part, to country-specific efforts in response to the pandemic. According to IMF data, there is no clear relationship between the amounts injected into the economy and recovery in 2021. As shown in the graph below, the effect of macroeconomic policies is only significant in some countries. Chile and Peru were the countries with the highest fiscal support since January 2020 as a percentage of GDP and, as a result, are two of the fastest-growing economies. Other countries offered minimal amounts but had a strong recovery, including Panama, El Salvador, Mexico and Nicaragua. And two island economies fell in 2021 despite the efforts.

The level of economic support was very different per nation as it depended on the discretion and strategy of each government. The average level of government efforts was 7.1% in Latin America alone, a much lower level than the G7 countries with 34% of their GDP on average. The fiscal injection concentrated in trade-related sectors rather than the health sector. In terms of liquidity support, most of it went to non-contingent liabilities, obligations whose fulfilment is not assured and are not considered a public expenditure.

The economic measures taken to counter the COVID crisis were: modifications to the tax code that provided relief to taxpayers and more lavish fiscal spending and liquidity efforts supported by governments. (ECLAC) These last are the provision of credit guarantees, loans to the private sector, the capitalisation of financial funds and institutions, and specific actions to maintain the health and social protection of the population.

Government efforts during the pandemic were necessary to achieve a rapid and sustained economic recovery. The case of Mexico exemplifies this. In 2021 Mexico grew 6.2% after a fall of 8.3% in 2020. Its growth is slightly below that of the Pacific Alliance countries. Still, the amount of money it injected into its economy was only 1.9% of GDP, one of the lowest levels in Latin America. A trade surplus explains the limited Mexican growth, reflected in a smaller current account deficit. OECD data show it went from an annual deficit of $200 billion in 2019 to a shortage of only $158 billion in 2021. This dynamic will not be permanent, however.

According to OECD data, domestic demand in the leading Latin American countries is above the pre-pandemic level, except in Mexico and Brazil. The latter is the country with the second-highest number of Covid-19 deaths worldwide, according to Expansión. There is a rapid recovery of consumption in Chile and Peru and a substantial investment recovery in Peru and Argentina. Meanwhile, public spending shifts to a positive trend in Argentina, Brazil, Chile, Colombia and Peru. On the other hand, Mexico shows signs of stagnation in all three domestic demand variables, especially investment.

In most of Latin America and the Caribbean, the pandemic has left a level of GDP below 2019 levels, with significant divergences in the trend of each country to overcome it. Five large Latin American countries have recovered, but the effect of fiscal and monetary policies is beginning to fade as the pandemic becomes a thing of the past. Still, they are better positioned than the G7 countries to benefit from rising commodity prices. Latin America is a primary exporter, so the external sector should not be much affected. Still, rising interest rates will impact domestic demand to fight inflation, so slow growth is expected with persistent imported inflation.

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