Persistent Inflation Poses Growth Risks In Latin America
- July economic activity prints for Brazil, Colombia and Peru set to be released over the course of this week will give an early indication of the region's economic rebound in Q321. Nearly every market in the region outperformed Fitch Solution’s initial expectations in H121, proving increasingly resilient to COVID-19 disruptions and leading to a round of upward forecast revisions.
- However, in many markets there are growing signs of slowdowns as headwinds to activity mount. In particular, inflation has also surprised significantly to the upside as a result of rebounding demand, high commodity prices and supply chain disruptions, among others. That is triggering increasingly aggressive interest rate hikes from central banks across the region.
- Elevated inflation and rising interest rates pose a number of risks to the near-term growth outlook. Inflation erodes household purchasing power, potentially slowing the consumption-driven rebound across the region, and raises risks to social stability as citizens demand greater government support.
- The political environment across the region is already volatile as nearly every market faces idiosyncratic risks including recent unrest against reforms and upcoming elections. That, in turn, suggests governments are unlikely to take significant steps to rein in spending that surged in response to the pandemic, even as rising interest rates increase debt servicing costs. As a result, investors should closely watch activity prints for signs of a greater slowdown.
(Source: Fitch Solutions)