The Latin American economy should see growth in 2022, after a better-than-expected 2021. Higher vaccination rates, service sector recovery, pre-electoral spending, rising (although still negative) interest rates and high commodity prices have helped boost the economy. However, challenges will remain, as inflationary pressures will persist and social unrest in Peru, Chile, Brazil, and Columbia will intensify.
The global stimulus strategy has been very successful from a return to pre-crisis standpoint. The Government played a larger role than expected in the 2021 recovery, and the massive fiscal spending to limit COVID-19’s impact led to higher-than-expected consumption. As a result, investment had to play catch-up, which caused significant supply chain bottlenecks. In turn, the higher consumer spending and investment increased export growth above the anticipated levels.
Key Growth Drivers in 2022 for the Latin American Economy
- Most countries will reach 80%+ vaccination rates in the first quarter of 2022, which will allow for more sustainable reopening, even with Omicron
- Governments will not react with ineffective and expensive lockdowns, which will allow the service sector to recover, boosting employment and helping to sustain consumption
- Governments will overstretch themselves because of social and political reasons
- Interest rates will remain negative in real terms, even as nominal rates rise in 2022
- Commodity prices will stay high, benefiting commodity exporting countries
Demand Outlook
The Latin American Economy will begin to return to normal as Covid restrictions are lifted. The service sector has the largest room to grow, while the retail, manufacturing and financial sectors are likely to stabilize.
The pandemic seems to have exhausted people’s financial cushions, as individuals are tapping into retirement accounts and extending lines of credit to finance their spending, though we are starting to see employment improve. Governments are also continuing to spend even in the face of fiscal constraints, so as not to compromise the economic recovery.
Inflation has picked up in 2021 and is expected to remain high through 2022. This poses a risk to discretionary spending power, and while the stimulus has supported consumption, inflation is already affecting retail sales in some markets.
Take a look at our full Latin American Snapshot Report for a full breakdown of the demand outlook for B2B, B2C and B2G.
Operating Conditions Outlook
There are several factors putting pressure on the global supply chain, which has led to a surge in input costs. In 2022, some of these surges will ease as demonstrated in the table below.
As cost pressures linger, inflation will rise and eat into wages. Inflation will remain above the central bank’s targets in 2022 due to high supply chain and energy costs, which will help companies justify price increases that they were unable to implement last year.
Markets now expect 3-4 hikes by the Fed in 2022 and central banks across major developed economies will try to solidify economic recovery through expansionary monetary policy. Emerging market currencies will continue to be under pressure, which will compound internal political uncertainties. We expect currencies to gradually continue to make up ground against the USD in 2022.
To stabilize fiscal deficits, governments will increase tax collection. Columbia has already approved a tax increase, while Argentina has already implemented a onetime wealth tax with additional increases expected. Peru and Ecuador are likely to follow, and Brazil and Chile have also discussed making changes.
Actions to take
While the Latin American economy will face challenges in 2022, companies can succeed by balancing short term priorities like timing pricing decisions and managing a return to the office, with long term bets, such as digital transformations and environmentally sustainable operations.
- B2C multinational corporations should continue to invest in technology and processes that build customer loyalty online, as many consumers are likely to stick with e-commerce. They should also consider streamlining operations and monitor employment recovery as the key indicator of retail growth.
- For business-to-business corporations, it will be key to adapt products and solution portfolio and payment terms to attract new investors.
- Meanwhile, B2G MNCs should try to gain price flexibility by renegotiating contracts in light of weak currencies and expand government engagement capabilities to get ahead of policy disruptions.
You can find more actions to take, as well as a focus on different markets in our full Latin America Snapshot Report
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