The economies of Latin America and the Caribbean face a complex juncture in 2022 due to the war between Russia and Ukraine, which ushers in a new source of uncertainty for the world economy.
This is negatively affecting global growth, now estimated at 3.3%, a percentage point below original projections before the hostilities began. At the regional level, lower expected growth will be accompanied by higher inflation and slow employment recovery.
According to new estimates released last month by the Economic Commission for Latin America and the Caribbean (ECLAC) in this press release, average growth of 1.8% is predicted for the region in this context, where the conflict in Ukraine has heightened inflation, increasing financial volatility and costs. The economies of South America will grow by 1.5%, Central America and Mexico 2.3%, while 4.7% growth is expected for the Caribbean economies (excluding Guyana).
The new figures were announced by the organization’s acting Executive Secretary, Mario Cimoli, to the ambassadors for the Group of Countries of Latin America and the Caribbean (GRULAC) during a meeting held on Wednesday at United Nations headquarters in New York.
According to ECLAC, the conflict in Ukraine will also negatively affect world trade dynamics, causing a decrease in foreign demand in Latin America and the Caribbean. The region’s main trade partners – the United States (US), China and the European Union (EU) – will see lower growth rates than those expected before the conflict began. In the case of the US, growth will be 2.8% (1.2 percentage points lower than previous projections). Projected growth for China is at 5% (0.7 percentage points less than before the hostilities), and for the EU, growth of 2.8% is expected (1.4 percentage points lower than pre-conflict projections).
The war in Ukraine has also caused an increase in commodity prices, mainly in fossil fuels, some metals, food and fertilizers. This price increase is in addition to higher costs observed due to disruptions in supply chains and exacerbated interruptions in maritime transport. These price hikes have given impetus to world inflation rates, in some countries reaching historic highs in 2022. In the face of the persistent and increasing inflation, higher interest rates in developed countries can be expected.
The United Nations regional commission adds that monetary adjustments in the countries of the North have accentuated the tightening of global financial conditions witnessed in recent months, causing greater volatility in financial markets. Alongside the increase in global aversion to risk resulting from the conflict in Ukraine, this has jeopardized capital flows to emerging markets. These trends may be accentuated in the coming months, especially if inflationary pressure persists in developed economies and the central banks in these economies deepen contractive monetary policies, including rate hikes and the reversal of monetary stimuli (asset purchases).
As in the rest of the world, inflationary dynamics have accelerated in Latin America and the Caribbean, warned ECLAC. As of March 2022, regional inflation is estimated at 7.5%, and many central banks in the region anticipate sustained high inflation for the rest of the year, given the greater uncertainty abroad in light of the war in Ukraine, especially in higher international energy and food prices, and disruptions in global supply chains, as well as persistent high transportation costs.
In response to higher inflation, monetary policy in central banks in the region has become more restrictive and the majority have significantly raised interest rates, which in most cases have reached levels similar to those observed in 2017. Retreating fiscal momentum is expected to accelerate in 2022, in step with the evolution of macroeconomic conditions and increased financing costs. Public expenditure will contract, reinforcing the reduction observed in 2021 and reducing fiscal policy contributions to growth.
Although labor markets are showing signs of recovery, this has been slow and incomplete. The pace of job creation in 2022 is expected to decline along with the slowdown projected for growth in the region. The combined factors of greater labor participation and lower job creation will drive higher unemployment rates this year, warns ECLAC.
