Look for weaker growth in Latam in 2025

January 16, 2025

Growth in Latin America (Latam) is expected to remain flat at 1.9% in 2025 and 2026, the same slow growth rate as in 2024. Expectations for rate cuts in the US have been reduced to just two in 2025. That, combined with stickier services inflation in Latam countries, means that central bank easing will be much slower than markets assumed just a few months ago. Fiscal concerns abound. Currency depreciation threatens progress on inflation across the region. Uncertainty surrounding tariffs and the impact on the region’s exports weighs more on Mexico than other countries; some may even benefit from a boost in commodity exports.

• Argentina: Inflation has cooled dramatically. Public finances are improving. Growth is expected to rebound in 2025; however, strict currency controls have resulted in exchange rate distortions.
• Brazil: Investor and business confidence have plummeted due to fiscal concerns and an overheated economy. Tighter monetary and fiscal policies will weigh on demand and growth.
• Chile: High electricity prices are contributing to inflation and hurting consumer budgets.
• Colombia: Fiscal concerns and above-target inflation may slow the pace of central bank rate cuts in 2025, though more cuts are expected.
• Mexico: Falling core inflation will support gradual monetary easing. Tariff and trade uncertainties will weigh on domestic policy.
• Peru: Inflation is within target while debt is low. Rising commodity exports are expected to boost growth.
• Uruguay: A strong consumer is contributing to both growth and inflation.
• Venezuela: Inflation is likely to remain high; additional sanctions by the incoming US administration could stunt investment and hurt growth.

Latam countries grew by a surprisingly strong 3.2% on a seasonally adjusted annual rate in the fourth quarter of 2024. That growth was driven by consumer spending and policy easing in most countries. Brazil, Mexico, Chile and Peru outperformed while Colombia lagged.

The Latam growth outlook for 2025 is tepid. Growth rates are expected to fall behind other emerging markets in Asia, the Middle East and Africa. An exception: After a sharp drop in output in 2024, Argentina will bounce back due to falling inflation and rising real wages.

Demand for commodity exports is expected to contribute to growth in Peru and Chile. The copper mined in these countries forms inputs into high tech and green manufacturing, areas where demand is rising. It is possible that Brazil, Peru and Chile benefit from increased commodity exports to different global trade blocs.

Minimum wage increases in Mexico, Chile, Brazil and Colombia will boost consumption and growth. At the same time, they help to put a floor under inflation and contribute to more hawkish monetary policies.

Uncertainties about global trade and tariffs weigh more on Mexico due to its economic linkages with the US. The United States-Mexico-Canada Agreement (USMCA) is due to be renegotiated in 2026. A failure to approve it would begin the process of sunsetting the agreement. The USMCA was designed as an upgrade to the 1994 North American Free Trade Agreement (NAFTA).

Growth in Brazil is expected to slow but not collapse in 2025. Consumers remain remarkably resilient and helped drive gains in 2024. Investors are increasingly concerned about Brazil’s unsustainable fiscal position and perceived political interference in monetary policy. The Brazilian real has depreciated considerably as bond yields have risen. Market participants view the government’s efforts at fiscal constraint as too incremental. Higher interest rates form a headwind, especially in the first half of 2025.

Latam central banks are much more accustomed to dealing with inflation than their counterparts in the US and Europe. Post-pandemic, that put them ahead on rate hikes and the subsequent cooling of inflation. Central banks in Brazil, Chile, Colombia, Mexico and Peru were then able to cut interest rates to stimulate their economies.

Overall inflation is expected to continue to decelerate in 2025 across Latam. The path down will be slower and bumpier than the path up. That leaves central banks in the region more hawkish, which means a slower path of rate cuts in some countries and rate hikes in others.

Service sector inflation remains particularly sticky. Currencies across the region have depreciated in response to higher bond yields in the US and concerns about fiscal sustainability. Brazil and Colombia rank highest in terms of those concerns.

The slower trajectory for rate cuts by the Federal Reserve adds insult to injury with spillover effects on currencies and interest rates in the Latam region. Mexico is among those most affected by the downshift in Fed rate cuts.

Central banks in Mexico, Chile, Colombia and Peru all cut rates in their final meetings in 2024. The banks in Mexico and Chile took on a more hawkish tone about future cuts due to concerns about underlying inflation. Colombia is expected to cut rates in 2025, but fiscal and inflation concerns could reduce the total amount of easing.

Conversely, central banks in Brazil and Uruguay raised rates on strong consumer spending. Brazil’s central bank raised the Selic rate by 100 basis points to 12.25% and signaled additional rapid tightening in the months ahead. It could very well overshoot but appears determined to assert independence and gain credibility; the improvements in recent decades were hard-won and could dissipate if the bank bows to political pressures.

Latam has the structural challenge of an aging population before achieving a higher level of GDP per capita. The demographic dividend, in which a younger population works and contributes to economic growth, is waning. This is especially the case in Brazil, Chile, Uruguay, Argentina and Mexico.

The aging population and low birth rates will dampen the size of the labor force, stunting GDP growth. That is before considering out-migration trends, which are being driven by a host of factors such as high poverty, worsening crime and climate change. Important industries in the region, including agriculture and energy, are being challenged by warmer temperatures and the erosion of the rainforest. Lower women’s labor force participation, partly due to a lack of adequate childcare options, is exacerbating the demographic challenges.

Healthcare and public pension systems are likely to be stressed. This will be a major challenge for countries that are already facing concerns about sustainable fiscal paths. Other structural issues include slow productivity growth, a relatively large informal sector and wealth and income inequality.

On a more positive note, Bogotá, Colombia has boosted the local economy with its Care Blocks program, which provides educational, training and social services to caregivers. Latam is a world leader in renewable energy. A thriving technology start-up scene has popped up in several major metro areas, including São Paulo and Mexico City.