In times of hyperbole and adjective inflation, the use of the term “historical” — in positive or negative – should be limited to very specific facts: reality has to sing a lot so that some truth can be seen as such. This is undoubtedly one of them: Latin American GDP will fall this year by an unprecedented 8.1%. A thick figure, much, but also significantly lower than it would have been if governments had not increased public spending to equally unprecedented levels to avoid major ills: according to calculations published thursday by the International Monetary Fund (IMF),without this momentum the perimeter of the economic crater would have been almost twice as large, between six and seven percentage points more.
Emerging nations—and Latin America is an important part of that club—are rightly said to have far less room for manoeuvre in fiscal and monetary policy than their rich peers. But, with few exceptions—Mexico is the most obvious—most countries in the region, with Brazil, Chile, Peru, and Argentina at the helm, have squeezed as much as possible their ability to act to mitigate a crash that did not enter any manual. Although the anti-crisis fiscal effort has been four points lower than the global average — eight percentage points of GDP versus 12 – the results are beginning to be there: the recession will be huge, yes, but without the thrombus appeal to markets it would rub the apocalyptic.
Brazil is the clearest example for the IMF that increased spending, especially on its social side, is giving progress this year: without the emergency aid programme to those who are passing it worst, the extreme poverty rate would have soared to nearly 15% of the population from the previous 6.7% of the pandemic. The temporary basic income for 60 million people has successfully reversed that trend, and in what way: far from 19th, extreme couldopy has fallen to the 5.4% environment. “These kinds of exceptional stockings are playing an essential role in supporting economic activity to avoid an even harsher recession and greater social impact,” the Washington-based agency’s technicians note in their review of the vital signs of the regional economy published on Thursday.
Monetary policy, also key
The news of this crisis does not come only from the fiscal flank. Ultra-exploited monetary policy seemed, until just a few months ago, possible only for advanced, more stable economies with inflation under control that have been in favour of investors since time immemorial.
But the pandemic has shown that middle-income nations can also pull this tool in times of maximum turbulence:most Latin American central banks have relaxed their monetary policy and injected significant amounts of liquidity since the health start, some of the area’s major economies—Brazil, Mexico, Peru—have lowered interest rates by more than two percentage points, and issuing institutes like Colombia have crossed the QE Rubicon with public and private debt purchases. “These programmes have reduced the cost of issuing governments and reduced market stress,” the IMF acknowledges.
At the equator of a new lost decade
Despite the action of governments and central banks, the economic horizon of the region is more than bleak. Unlike during the 2008 and 2009 financial crisis, which shook the United States and Europe but had little impact on the region—which was able to get hooked on China’s good march and its voracious appetite for raw materials—thistime things are different: commodities are back, pre-discrimination values and remittances have generally endured better than expected, but tourism remains paralyzed, domestic consumption has been badly touched, and informal employment, which hagged the blow in previous recessions, has taken the brunt.
“Now domestic and external factors are moving in tandem, and the medium-term outlook is pointing to a long recovery, with lasting costs,” warn the Fund’s economists, who do not believe that regional GDP will return to the pre-pandemic level until, at the latest, 2023.
With the data in hand, the region is once again facing the eternal déja vu of the lost decade: according to IMF estimates, per capita income will reach 2025 at the same level or even below the starting point of 2015. “That means Latin America and the Caribbean are facing a new lost decade, as in the 1980s,” they outline from the multilateral. “Covid-19 will have a broad impact on employment and will erase some of the social progress made by the region until 2015. Current estimates indicate lasting income losses, poverty will increase substantially, and income inequality in Latin America and the Caribbean, which was already one of the highest in the world before the pandemic, will worsen.” Only public spending, which has lowered the category of the economic hurricane from hecatombe to horse crisis, and assistance programmes will be able to “cushion the impact.”