Global Navigator from KPMG Economics

Global growth is expected to stabilize in 2024, remaining close to the pace we hit pre-pandemic during the year.

Topics We Are Watching 

This inaugural edition of Global Navigator explores three critical topics and their potential impact on the world economy, with a specific focus on Latin America.

1. Global growth is poised to slow only slightly. Global growth is expected to slow slightly from a 2.7% annual average in 2023 to a 2.5% pace in 2024, the same as the pre-pandemic 2.5% pace in 2019. Many of the hardest hit economies by the pandemic recession, notably in Latin America, are expected to drive gains. 
2. Central bankers globally weigh rate cuts. Central banks are poised to cut rates in 2024, which will provide a tailwind for growth. Many of Latin America’s largest economies are at the leading edge of those moves, which is already spurring growth, along with increased business investment and a diversification of supply chains.
3. Risks to the outlook. Central bankers are loath to cut before they know their inflation targets can be met. History is littered with examples of banks that did so only to stoke a more corrosive bout of inflation or worse, stagflation. The desire to cut before inflation has been fully tamed, especially in economies mired in recession, remains the largest risk for central banks both in Latin America and elsewhere. Negative exogenous shocks, from climate changes to escalating armed conflicts and a reduction in global competition, risk reigniting inflation.

Growth in Latin America is expected to accelerate to 2.5% year-over-year in 2024, above the 2.2% pace of 2023. Those Latin American countries that were quick to raise rates have been able to tame inflation; as a result, they are better poised to cut rates and reap the benefits of those cuts now. Chart 1 shows that Chile and Brazil are expected to outpace the US, which has been the leader among the developed economies since the onset of the pandemic. Mexico is behind the US but poised to accelerate in 2025, while Argentina falls behind in 2024. Colombia and Peru are both expected to bounce back from a weak 2023 with steady growth in 2024. Venezuela is likely to benefit from elevated oil prices in the near-term.

Most central banks globally have reached the height of their tightening cycles but have not yet indicated when they will begin to roll back restrictive policy. Our forecast indicates that most central banks will begin rate cuts in the latter half of 2024 and first half of 2025. Normalizing rates after a bout of inflation is slower than cutting rates to stimulate the economy. The urgency to cut is lower; policy is expected to remain restrictive across many developed countries through year-end.

Latin America is an outlier on this front. Many central banks in that region raised rates faster than their counterparts in the developed world, tamed inflation and are now well positioned to cut more aggressively.

Inflation in Brazil, Mexico and Chile has now been within shooting distance of their respective targets since Q2 2023. The Banco Central do Brasil (BCB), Banco Central de Chile (CBoC), Banco Central de Reserva del Perú (BCRP), the Bank of Mexico (Banxico) and Colombia’s Banco de la República have all begun to cut rates. Banco Central de la República Argentina (BCRA) and Banco Central de Reserva del Perú (BCRP) have cut rates for an entirely different reason: to stimulate in the face of a technical recession.

The risk of cutting rates too early is reigniting inflation – the cardinal sin of central banking. Several LATAM central banks have historically made that mistake. From the mid-1980s to mid-1990s, Brazil had five different failed economic stabilization plans, five different currencies and hyperinflation, reflecting abrupt policy changes before inflation was under control.

That is what makes Latin America’s position today so remarkable: central banks moved early and aggressively against inflation, learning from the mistakes of the past. The BCB, Banxico and CBoC all got real interest rates into positive territory more than a year ahead of the Federal Reserve. Now these central banks can cut earlier, leaving more room for growth in 2024.

Latin American countries have also been at the forefront of raising minimum wage rates. Brazil, Mexico, Colombia and Chile have recently raised or will raise the minimum wage in 2024. These wage increases could help reduce extreme poverty and inequality in a region where high inequality acts as an economic headwind and restricts output. This could add to wage costs and inflationary pressures but could also hedge against strikes and protests that fuel economic and policy uncertainty.

Another tailwind in Latin America is supply chain diversification. Brazil and Mexico were two out of the four top recipients of foreign direct investment in 2023, allowing for higher growth amidst restrictive monetary policy. Mexico has benefitted from the US-Mexico-Canada Agreement (USMCA), giving a boost to manufacturing and employment growth (similar, albeit more muted trends are observable in Central America).

An outlier in Latin America is Argentina. Argentina’s situation is an example of the dangers in cutting policy rates too early. The central bank is choosing between stimulating in a recession or getting hyperinflation under control. It has chosen the former: BCRA has begun to cut. Our forecasts indicate that inflation, at 254% year-over-year in January 2024, has not yet hit its peak. That is a repeat of history: Argentina has defaulted nine times on its sovereign debt and has been the recipient of over 20 IMF arrangements.

Regional Risks: Given that several Latin American central banks have already begun to cut, the risk of reigniting inflation in the region is higher. More persistent services inflation or a shock to goods/energy prices could boost inflation, while sudden reductions in employment or output or declining demand for exports could spur central banks to cut rates, risking another bout of high inflation. Domestic policy uncertainty and social instability are at elevated risk in this region and could derail the trajectory of growth. An extended period of tighter US monetary policy could result in capital flight, currency and debt issues. This happened in the 1980s and mid-1990s. 

Latin America as a whole is expected to be driver of overall economic gains in 2024, aided by a tailwind of rate cuts and a commensurate rebound in business investment. However, gains will remain extremely uneven throughout the region. A key differentiator this year is whether a central bank is cutting after taming inflation or cutting to stimulate a moribund economy. Economies such as Brazil and Mexico will reap the benefits of getting inflation under control earlier, whereas the situation in Argentina will get worse before it gets better.