Slower Growth

Stubborn Inflation
APRIL 3, 2023

Nigel Chalk
Acting Director

IMF | Western Hemisphere Department - Regional Economic Outlook 1

 Recent Outturns

IMF | Western Hemisphere Department - Regional Economic Outlook 2

 The region proved more resilient in 2022
Nevertheless, activity is slowing
Real GDP Growth by WEO Vintage, 2022 LA5: Economic Activity Index
(Year-over-year percent change) (Median; year-over-year percent change)

5 21
April 2022 October 2022 April 2023
18
4
15

12
3

2
6

3
1

0 -3
Latin America and the Caribbean LA5 Jul-21 Nov-21 Mar-22 Jul-22 Nov-22

Sources: IMF, World Economic Outlook database; and IMF staff calculations. Sources: Haver Analytics; national authorities; and IMF staff calculations.
Note: Aggregates are purchasing-power-parity GDP-weighted averages. Note: Shaded area shows min-max range of LA5 countries. LA5 = Brazil, Chile, Colombia, Mexico, Peru.

IMF | Western Hemisphere Department - Regional Economic Outlook 3

 Weakening support from both external and domestic factors
Merchandise Export Growth LA5: Confidence Indices
(3-month moving sum; year-over-year percent change) (Normalized z-score; three-month moving average)

60 1
LatAm CHN
JPN-KOR USA-CAN
50
EU Other

40
0
30

20
Total
–1
10

–2
–10
Consumer confidence
Business confidence
–20

–30 –3
Jan-20 Oct-20 Jul-21 Apr-22 Jan-23 Jan-19 Jan-20 Jan-21 Jan-22 Jan-23

Sources: Haver Analytics; national authorities; and IMF staff calculations. Sources: Haver Analytics; national authorities; and IMF staff calculations.
Note: Includes Argentina, Brazil, Chile, Colombia, Mexico, and Uruguay. Note: Consumer confidence index is the simple average of Brazil, Chile, Colombia, and Mexico. Business
confidence index is the simple average of LA5. LA5 = Brazil, Chile, Colombia, Mexico, Peru.

IMF | Western Hemisphere Department - Regional Economic Outlook 4

 Monetary policy has not yet
put inflation on a decisive downward path
LA5: Headline Consumer Price Inflation LA5: Core Consumer Price Inflation
(Median; year-over-year percent change) (Median; year-over-year percent change)

15 15

12 12

9 9

6 6

3 3

0 0
Jan-20 Oct-20 Jul-21 Apr-22 Jan-23 Jan-20 Oct-20 Jul-21 Apr-22 Jan-23

Sources: Haver Analytics; national authorities; and IMF staff calculations. Sources: Haver Analytics; national authorities; and IMF staff calculations.
Note: Shaded area shows min-max range of LA5 countries. LA5 = Brazil, Chile, Colombia, Mexico, Peru (Lima). Note: Shaded area shows min-max range of LA5 countries. LA5 = Brazil, Chile, Colombia, Mexico, Peru (Lima).

IMF | Western Hemisphere Department - Regional Economic Outlook 5

 Financial conditions have been easing, …
LA5: Selected Financial Indicators LA5: Real Credit Growth
(Change; October 2022 to date) (Year-over-year percent change unless noted otherwise)

Basis points Percent change 9 Corporate Consumer/households Mortgage

80 8

60 6 7

40 4
5 Real credit
20 2 growth

0 0 3

-20 -2
1
-40 -4

-60 -6 -1

-80 -8
US$ bond LC bond EMBIG Corporate Equity Exch. -3
yields yields spreads prices rates 2019:Q1 2019:Q4 2020:Q3 2021:Q2 2022:Q1 2022:Q4

Sources: Bloomberg Finance L.P.; and IMF staff calculations.
Note: LA5 is simple average. Latest data are as of March 30, 2023. LA5 = Brazil, Chile, Colombia, Mexico,
Peru.
IMF | Western Hemisphere Department - Regional Economic Outlook
Sources: Haver Analytics; national authorities; and IMF staff calculations.
Note: Credit aggregates are fiscal year US dollar nominal GDP-weighted averages. FCI is PPP GDP-weighted
average For methodology and variables included in the financial conditions index, refer to the online annex of
the October 2018 Global Financial Stability Report. FCI = financial conditions index; LA5 = Brazil, Chile,
Colombia, Mexico, Peru. 6
 … limited impact from the turmoil in
AE banking systems so far
LA5: Selected Financial Indicators
(Change)
Basis points Percent change
80 8
SVB collapse-to-date
Year-to-SVB collapse
60 6

40 4

20 2

0 0

-20 -2

-40 -4
US$ bond yields LC bond yields EMBIG Corporate Equity prices Bank equity Exchange rates
spreads
Sources: Bloomberg Finance L.P.; national authorities; and IMF staff calculations.
Note: SVB (Silicon Valley Bank) collapse: March 10, 2023. EMBIG: J.P. Morgan Emerging Market Bond Index Global spread. Corporate spreads (CEMBI): J.P. Morgan Corporate Emerging Market Bond Index spread. Exchange rates:
increase denotes an appreciation. LA5 is simple average. Latest data are as of March 30, 2023. LA5 = Brazil, Chile, Colombia, Mexico, Peru.

IMF | Western Hemisphere Department - Regional Economic Outlook 7

 Fiscal policy has been neutral while output gaps turned
positive
General Government Fiscal Impulse LA5: Output Gap
(Percentage points of GDP) (Median; percent of potential real GDP)

12 5
2020 2021 2022 2023

8
0

4
-5

-10
-4

-15
-8

-12 -20
BRA CHL COL MEX PER LA5 2019Q1 2019Q4 2020Q3 2021Q2 2022Q1 2022Q4

Sources: IMF, World Economic Outlook database; and IMF staff calculations. Sources: IMF, World Economic Outlook database; and IMF staff calculations.
Note: Defined as the change in structural primary deficit. Chile refers to the central government’s change in structural Note: Shaded area shows min-max range of LA5 countries. LA5 = Brazil, Chile, Colombia, Mexico, Peru.
non-mining primary deficit. Colombia refers to the consolidated public sector's change in structural non-oil primary
deficit. Peru refers to the nonfinancial public sector’s change in structural primary deficit. Aggregate is fiscal year US
dollar nominal
IMF | Western GDP-weighted
Hemisphere average.
Department LA5 = Brazil,
- Regional Chile, Colombia,
Economic OutlookMexico, Peru. 8
 Outlook and Risks

IMF | Western Hemisphere Department - Regional Economic Outlook 9

 Slowing growth, stubbornly high inflation
Western Hemisphere: Real GDP Growth and Inflation
(Year-over-year percent change)
Real GDP Growth Headline Inflation, end of period

Projections Projections

2021 2022 2023 2024 2021 2022 2023 2024

United States 5.9 2.1 1.6 1.1 7.4 6.6 3.0 2.1
Canada 5.0 3.4 1.5 1.5 4.7 6.6 3.0 2.1
Latin America and the Caribbean (LAC) 7.0 4.0 1.6 2.2 11.6 14.7 11.8 7.7
LAC excluding Argentina and Venezuela 6.7 3.7 1.7 2.2 7.8 7.8 5.4 3.7
South America 7.5 3.9 1.0 1.9 14.1 18.3 15.6 9.9
CAPDR 11.0 5.3 3.8 3.8 5.1 7.4 4.7 3.6
Caribbean
Tourism Dependent 7.8 7.2 3.2 2.4 5.4 7.9 4.3 3.4
Non-Tourism Dependent 2.5 17.2 13.6 20.0 11.7 20.2 13.6 6.7
Of which: Commodity Exporters 4.7 25.5 18.7 25.8 11.0 13.0 7.6 4.9
Memorandum items:
LA5 6.5 3.4 1.2 1.7 8.3 7.8 5.4 3.7
Brazil 5.0 2.9 0.9 1.5 10.1 5.8 5.4 4.1
Chile 11.7 2.4 –1.0 1.9 7.1 12.8 5.0 3.0
Colombia 11.0 7.5 1.0 1.9 5.6 13.1 8.4 3.5
Mexico 4.7 3.1 1.8 1.6 7.4 7.8 5.0 3.5
Peru 13.6 2.7 2.4 3.0 6.4 8.5 3.0 2.3
Sources: IMF, World Economic Outlook database; and IMF staff calculations.
Note: Aggregates are PPP GDP-weighted averages. For growth, green/red denotes upward/downward revision compared with the October 2022 WEO forecasts. For inflation, red/green denotes
upward/downward revision compared with the October 2022 WEO forecasts. All inflation aggregates exclude Venezuela. WEO data are as of March 28, 2023. CAPR includes Costa Rica, Dominican Republic, El
Salvador, Guatemala, Honduras, Nicaragua, and Panama. Caribbean: Tourism Dependent encompasses the rest of the Caribbean countries not included in the Caribbean: Non-Tourism Dependent group, which
includes Commodity Exporters (Guyana, Suriname, Trinidad and Tobago) and Haiti. LA5 includes Brazil, Chile, Colombia, Mexico, and Peru.
IMF | Western Hemisphere Department - Regional Economic Outlook 10
CAPDR: A solid recovery but waning support from remittances
Economic Activity Remittance Inflows
(Year-over-year percent change; 3-month moving average) (Billions of US dollars, unless otherwise indicated)

40 50
DOM NIC
Remittance inflows to CAPDR
HND SLV
30 GTM CRI Growth of remittances (percent)
PAN 40

20

30
10

0
20

-10

10
-20

-30 0
Jan-19 Oct-19 Jul-20 Apr-21 Jan-22 Oct-22 2017 2018 2019 2020 2021 2022

Sources: Haver Analytics; national authorities; and IMF staff calculations. Sources: Haver Analytics; national authorities; and IMF staff calculations.

IMF | Western Hemisphere Department - Regional Economic Outlook 11

 Caribbean: A recovery of output amid persistent inflation
Real GDP Level Consumer Price Inflation
(Index: 2019 = 100) (Period average; year-over-year percent change)

170 12
Tourism dependent 2022 2023
160 Non-tourism dependent
10
Commodity exporters
150

8
140

130
6

120
4
110

100 2

90
0
JAM BLZ BRB BHS LCA ATG DMA VCT GRD KNA ABW GUY TTO
80
2019 2020 2021 2022 2023 CARTD CARCE

Sources: IMF, World Economic Outlook database; and IMF staff calculations. Sources: IMF, World Economic Outlook database; and IMF staff calculations.
Note: Tourism Dependent encompasses the rest of the Caribbean countries not included in the Non-tourism Note: CARCE = Caribbean; Commodity exporters; CARTD = Caribbean: Tourism dependent.
Dependent group, which includes Commodity Exporters (Guyana, Suriname, Trinidad and Tobago) and Haiti.

IMF | Western Hemisphere Department - Regional Economic Outlook 12

 Risk 1: More persistent inflation
Year-over-year Inflation: Response to a 1pp Monetary Headline Inflation and Consensus Forecasts
Policy Shock (Percent)
(Percentage points)

0.2 16
Target range (2023)
Headline (actual, February 2023)
On impact One year later Two years later Three years later 14 End-2023 expectations (CF February 2023)
0.1 End-2024 expectations (CF February 2023)

12
0.0
10
-0.1
8

-0.2
6

-0.3 4

2
-0.4

0
-0.5 Colombia Chile Peru Mexico Brazil

Sources: IMF staff calculations.
Note: Impact of a 1p.p. shock to the policy rate estimated through a panel local projection method. Controls
include lagged inflation, inflation expectations, lagged output gap, changes in the exchange rate, lagged values
of the shock, and external variables. See Brandao-Marques et al. 2020 for more details
IMF | Western Hemisphere Department - Regional Economic Outlook
Sources: Consensus Economics; Haver Analytics; and national authorities.
Note: Brazil inflation target is set to decline over time from 3.25 percent in 2023 to 3 percent in 2025. Chile
does not have tolerance bands; midpoint target is shown.
13
 Risk 2: Tighter global financial conditions
Impact of a 1 Percent Increase in US 2y Rates Increase in Public Debt-to-GDP 2022–28:
(Percent) From a Larger Fed Tightening
(Percentage points)

2.5 0.6 10
On impact
One year later
Two years later Additional US tightening Baseline
0.4
1.5 Three years later 8

0.2
0.5 6
0.0

-0.5
4
-0.2

-1.5
-0.4 2

-2.5 -0.6
LC/USD exchange Gross capital flow Real GDP 0
rate to GDP LA5 LAC EMDE

Source: IMF staff calculations.
Note: Impulse response one year later and largest impact within the first three years, based on local projection
estimation for LA5. Size of the shock is one percentage point increase in US 2-year bond yield. In Changes in
gross capital flow to GDP ratio is measured in percent of GDP. LA5 = Brazil, Chile, Colombia, Mexico, and Peru.
IMF | Western Hemisphere Department - Regional Economic Outlook
Sources: IMF, World Economic Outlook database; and IMF staff calculations.
Note: In the additional US tightening scenario, the interest rate for new domestic and foreign currency
denominated debt increases by the additional Fed tightening of 85 basis points on average (2024-2027) 50
basis points risk premium (2024-2025). EMDE = emerging market and developing economies, excluding China,
Latin America and the Caribbean; LA5 = Brazil, Chile, Colombia, Mexico, Peru. 14
 Risk 3: Social tensions
Employed Labor Income by Income Decile Fraction of Countries with Elevated Social Unrest and
(Percent) Global Uncertainty
(12-month moving average)
Bottom 50% Top 10%
45 50
Share of LAC countries with elevated social unrest
24 50
Latest Latest pre-pandemic World Uncertainty Index (right scale)
40
22
46 40
35

20
42 30
30
18
25
38
16
20
20
34
14
15

12 30 10 10
BRA CHL COL MEX PER LA5 BRA CHL COL MEX PER LA5 Jan-14 Jan-16 Jan-18 Jan-20 Jan-22

Sources: CEPALSTAT; and IMF staff calculations.
Note: LA5 is purchasing-power-parity GDP-weighted average. Latest available for BRA, COL, and MEX is
2021, and for MEX and CHL 2020. Latest pre-pandemic for BRA, COL, and PER is 2019, for CHL is 2017, and
for MEX 2018. LA5 = Brazil, Chile, Colombia, Mexico, Peru.
IMF | Western Hemisphere Department - Regional Economic Outlook
Sources: Barrett et al (2022) for unrest, Ahir et al (2020) for World Uncertainty Index and IMF staff calculations.
Note: Share of countries with reported social unrest index above the within-country 75th percentile for the index in the
period between January 2010 and January 2023. 12-mma = 12-month moving average. LA4 = Brazil, Chile,
Colombia, Mexico.
15
 Policy Priorities

IMF | Western Hemisphere Department - Regional Economic Outlook 16

Maintaining tight monetary policy is needed to lower inflation
LA5: Policy Rate LA5: Inflation, period average
(Nominal; percent; PPP-weighted average) (Year-over-year percent change; PPP-weighted average)

15 14
Desk policy rate forecast (baseline)
Bloomberg policy rate forecast
12
12

10

9
8

6
6

3
2

0 0
2019Q4 2020Q4 2021Q4 2022Q4 2023Q4 2024Q4 2019Q4 2020Q4 2021Q4 2022Q4 2023Q4 2024Q4

Sources: Bloomberg Finance L.P. (for forecasts); Haver Analytics; IMF, World Economic Outlook database;
national authorities; and IMF staff calculations.
Note: LA5 is purchasing-power-parity GDP-weighted average. Shaded area shows min-max range of LA5
countries. LA5 = Brazil, Chile, Colombia, Mexico, Peru.
IMF | Western Hemisphere Department - Regional Economic Outlook
Sources: Haver Analytics; IMF, World Economic Outlook database; national authorities; and IMF staff
calculations.
Note: LA5 is purchasing-power-parity GDP-weighted average. Shaded area shows min-max range of LA5
countries. LA5 = Brazil, Chile, Colombia, Mexico, Peru.
17
 More fiscal effort is needed to rebuild buffers and support
disinflationary efforts
LA5: Structural Primary Balance LA5: Structural Primary Balance, Model Estimates
(Percent of potential GDP) (Percent of potential GDP)

2 2
WEO baseline Baseline
Desk policy advice Lower potential growth
1 1

0 0

-1 -1

-2 -2

-3 -3

-4 -4
2010 2013 2016 2019 2022 2025 2028 2010 2013 2016 2019 2022 2025 2028

Sources: Fournier, J.M., 2019, “A Buffer-Stock Model for the Government: Balancing Stability and Sustainability ,”
IMF Working Paper No. 19/159; IMF, World Economic Outlook database; and IMF staff calculations.
Note: LA5 is US dollar fiscal year nominal GDP-weighted average. LA5 = Brazil, Chile, Colombia, Mexico, Peru.
IMF | Western Hemisphere Department - Regional Economic Outlook
Sources: Fournier, J.M., 2019, “A Buffer-Stock Model for the Government: Balancing Stability and Sustainability ,”
IMF Working Paper No. 19/159; IMF, World Economic Outlook database; and IMF staff calculations.
Note: The scenario with lower potential growth assumes potential growth 0.5 percentage points lower than in the
WEO. LA5 is US dollar fiscal year nominal GDP-weighted average. LA5 = Brazil, Chile, Colombia, Mexico, Peru.
18
 Main Messages

 The region’s growth has held up better-than-expected in 2022

 Growth will slow in 2023, but not a recession
 Despite early action by the region’s central banks, inflation is proving a stubborn foe

 Policy challenges:
 Near term: Reducing inflation will require a sustained, restrictive policy stance.
Fiscal policy needs to carry more of the burden. This may prove difficult in the face
of continuing social strains.

 Medium term: Need to restore the pre-pandemic fiscal position in a way that is
progressive (on both tax and spending), addresses long-standing supply
constraints, and responds to pressing social demands.

IMF | Western Hemisphere Department - Regional Economic Outlook 19

 Thank You

IMF | Western Hemisphere Department - Regional Economic Outlook 20