Recession risk looms as recovery loses momentum

By Felipe Hernández, economist

Activity in most of Latin America returned to its pre-pandemic level sometime between February and September 2021. After the sharp drop in early 2020 when the pandemic began, the recovery was much faster than anticipated, but it is losing. momentum quickly. Activity in the second and third quarters was already falling in some countries, undoing previous increases and highlighting the risk of a recession.

The results are consistent with the limited improvement in base effects after a sharp decline in 2020 and recovery based on relief in 2021. They are in line with the limited scope and transitory nature of expansionary fiscal and monetary policies and other extraordinary measures that boosted internal demand and activity in 2021.

The data supports concerns about the challenging growth outlook for 2022, as high inflation and levels of public sector debt bring with them tighter monetary and fiscal conditions. Increased political noise and less favorable external financial market conditions are additional headwinds.

Brazil was the first country in the region to see an increase in activity above its pre-pandemic level, briefly in February 2021. The trend changed rapidly thereafter, with a contraction of GDP in the second and third quarters and a activity below pre-pandemic levels. It fell again in October, suggesting that GDP could extend its downtrend.

Activity in Mexico was closer to its pre-pandemic level in March 2021, but has not yet exceeded that level and the gap has widened since then. GDP fell in the third quarter. Activity fell in October for the third consecutive month, which implies a high probability that GDP will contract in the fourth quarter.

Chile has experienced the strongest rebound. Activity is well above its pre-pandemic level and data through October showed that it continues to increase. Growth is expected to fall sharply in 2022, and the central bank’s forecast points to a drop in GDP in the first three quarters.

Argentina, Colombia and Peru have had a more moderate recovery. Activity rose above its pre-pandemic level in July in Argentina and Colombia and in September in Peru. However, activity in all three countries remains only slightly above pre-pandemic levels. The uptrend has been more volatile and data through October suggested it could be losing momentum.