Slow but steady
Downside risks = geopolitical tensions, lack of fiscal discipline and currency fluctuation.
November 18, 2025
Economic growth in Latin America (Latam) is projected to slow to 1.8% in 2026 from 2.2% in 2025. Inflation, while sticky, is trending toward target across the region. Interest rates remain high. Central banks are cautiously beginning easing cycles which are slated to continue next year. Tariffs and the threat of tariffs are shifting trade relationships in the region but have so far had a limited impact on total exports. Domestic demand is weaker as wage growth has slowed. Downside risks to our forecast include escalating geopolitical tensions, financial and currency volatility and shifting priorities in fiscal policy.
- Argentina: While imminent risk of a currency crisis has waned, the peso remains overvalued and weighs on exports and FX reserves. The good news is that inflation has come down to its lowest level since 2018.
- Brazil: Both inflation and inflation expectations have begun to fall. Domestic demand growth is signaling some consumer stress. We expect an easing cycle to begin in early 2026, though the central bank will proceed with caution.
- Chile: Progress on disinflation is expected to slow as growth has beaten expectations and is expected to remain higher than most of Latam.
- Colombia: Growth is expected to lead in the region due to a large minimum wage increase. Tariff threats are a risk, but a large negative impact on the economy is not in our base case.
- Mexico: Weakness in the service sector has led Mexico to be a laggard in the region in terms of growth. The central bank will continue its rate-cutting cycle as growth slows and inflation appears to be pointing down. The forecast for Mexico is highly contingent upon the fate of the 2026 United States-Mexico-Canada Agreement (USMCA) renegotiation.
- Peru: Geopolitics is front-of-mind. The election cycle has lingered for consumer confidence. The impact on financial markets has been limited, but investment could be hit harder.
- Uruguay: The domestic economy is driving growth as financial conditions ease, while exports have not been impacted by global trade turmoil. Inflation remains well within the central bank’s target.
- Venezuela: The forecast is highly uncertain, depending on the outcome of sanctions, currency depreciation and geopolitical tensions.
Growth expected to slow in 2026
Growth in Latam slowed to start the second half of 2025 and into 2026. Headwinds are beginning to emerge, including lower prices for key commodities, soft wage growth and fiscal austerity measures. Monetary policy has remained tighter due to sticky services sector inflation. Trade has been the bright spot for export-heavy Latam economies, including Brazil and Mexico.
Growth is forecast to slow further in 2026 and bring down above-target inflation. That should pave the way for central banks in the region, which have taken a more hawkish stance relative to other central banks around the world to ease policy. That should help support consumer finances, which have been resilient but are weakening.
Industrial production has held up but is flashing yellow with some sectors starting to get hit by changes in global trade policy. That is the case even as exports remain resilient and reflect high policy uncertainty surrounding trade that is unlikely to abate soon.
Our forecast calls for export demand to remain healthy, but risks are to the downside if global trade wars escalate, or if Latam becomes more of a target of changing trade policies. Lower commodity prices in oil/gas, metals, rare earths and agriculture bite even when export demand is high. Industrial production has slowed in recent surveys; orders look weaker relative to earlier this year when foreign buyers were stocking up.
Weaker GDP growth is a challenge in Latam, given the need for more fiscal austerity to balance budgets and the desire to stimulate social and economic development. Slower labor force growth from aging populations could exacerbate existing fiscal challenges.
Shifting trade winds
Global trade policy has constantly evolved in 2025. Latam has remained relatively insulated from some of the uncertainty; it has not been immune. The region was spared the worst of the April 2 tariffs when most countries faced a baseline 10% tariff. Copper tariffs were much less severe on the Andean economies including Chile, Ecuador and Peru due to exemptions. In fact, carveouts left most of Latam’s copper industry relatively untouched.
Other targeted exports to the US such as pharmaceuticals, lumber and furniture represent less than 0.1% of the region’s GDP. Some economies, like Mexico, have benefitted from carve outs for high-tech exports; much of the rise in exports to the US has come from computer parts used in artificial intelligence (AI) infrastructure.
However, Brazil has been targeted with 50% tariffs while Colombia has faced threats. US Negotiations with Brazil are ongoing even as the agricultural sector shifts more toward China; Brazil’s rich natural resources in rare earths are a focal point of negotiations.
Rare earths are one of the biggest focuses of US trade policy as policy makers would like to become more diversified in mining and refining. Focusing on national security interests could calm trade tensions and leave the region better off. Argentina and Central America have followed suit in that vein in their own economic negotiations with the US, with new agreements emerging between the US and Argentina, Guatemala, Ecuador and El Salvador.
One trend resulting from global trade tensions has become more deeply entrenched: “friendshoring,” as economies in the region shift more toward the US or China. China, for example, is the largest trading partner of Brazil, Chile, Uruguay and Peru. China and other countries have provided destinations for capacity that the US would have filled.
Brazil’s soybean exports are a prime example. The country spurred large exports to China to fill demand usually served by the US. The result showed total Brazilian exports slightly increased, while exports to the US dropped 10%. However, the desire to do more trade with closer geopolitical allies could pose a risk for countries that rely both on US and China trade. That includes Argentina, Brazil, Chile, Peru and Ecuador.
There is a way Latam could benefit from global trade tensions: by framing itself as a way to nearshore US supply chains, or as a jumping off point to other countries. Mexico is a prime example – it has free trade agreements with over 50 countries, offering ways to decrease potential frictions. Latam is growing its trade relationships in general, with the EU seeking to sign a trade agreement with the Mercosur, along with Canada. That would create a free trade block of 830 million people who account for more than a quarter of global GDP.
The biggest barriers to Latam taking advantage of those trends are 1) institutional and infrastructure quality and 2) uncertainty. Building supply chain relationships requires stability and trust.
The fate of the USMCA free trade agreement is the largest downside risk from trade in the near term. US imports under USMCA are exempt from tariffs. Utilization of USMCA has risen from 30-40% earlier in the year to 90% or more. USMCA was written with a “sunset clause;” if the renegotiations go poorly, that could cause USMCA to sunset by at least 2036, if the participating countries do not pull out of it earlier. Mexico has already taken steps, however, to signal alignment with the US ahead of the negotiations. The fear is we get only bilateral agreements, rather than a full regional agreement.
The macroeconomic implications of geopolitical shifts
There are broader forces shaping the macroeconomic forecast in Latin America; the region is no stranger to political and geopolitical risk. Geopolitical dynamics can influence how institutions function, how governments manage their fiscal policy and how investors perceive risk.
Political uncertainty is weighing on investment and market sentiment. Major elections in Peru, Brazil, Bolivia, Argentina and Colombia have heightened volatility, as new administrations mean new priorities and fiscal reforms. Historically, such uncertainty has led to slumps in investment, while positive developments—such as trade negotiations—can quickly move markets as seen with Colombia after US tariff concerns eased.
Fiscal challenges remain a key risk. Many countries in the region require austerity measures to stabilize debt, but election cycles often cast doubt on such plans as incumbents have tempted to loosen targets ahead of elections. While central banks have worked to maintain independence, political dominance cannot be ruled out based on history.
Currency risk is concentrated in Argentina, where an overvalued peso and rigid exchange rate regime raise the risk of a larger correction. Countries like Brazil, Uruguay and Mexico face significantly lower but still notable risks to investor confidence.
Central bank responses to slower growth; inflation dynamics
Even as growth and inflation have slowed, central banks generally have taken a more hawkish stance. The length of time that inflation has remained above target is longer than most expected in Latam. Central banks are sensitive to the upside risks from inflation across the region.
Central banks that have not already cut to neutral are likely to start or continue their easing cycles, but it could be slower than in the past. The pace may vary across different central banks depending on where they fall in their target inflation bands.
Mexico’s central bank has been cutting rates and is likely to continue as the economy has slowed. Inflation came down more rapidly in the third quarter and likely slowed further to start the fourth quarter. The domestic economy has slowed but not collapsed. Manufacturing Purchasing Managers Indexes (PMIs) are pointing in the wrong direction.
Brazil, on the other hand, stood alone as central banks began raising rates this year and stopped over the summer. Inflation has come down but too slowly to begin an easing cycle yet. A slowdown in overall growth and the labor market should spur the central bank to begin cutting rates cautiously in 2026.
In a similar camp are Chile and Colombia, whose unexpected strength caused inflation to rise over the summer. That spurred their central banks to stop easing. They are unlikely to resume until the inflation picture improves, potentially next year. Peru’s central bank has reached what officials consider to be a neutral rate.
In a global context, central banks in the region are watching the Federal Reserve closely for signals of how much it will cut rates to avoid rapid swings in currency, equities or bonds. For the first half of 2026, we expect the Fed to move more slowly, before accelerating an easing cycle later in the year when the composition of the leadership will turn more dovish. That should give central banks in Latam more wiggle room to cut rates if the domestic picture warrants it.
Latam could benefit from global trade tensions: by framing itself as a way to nearshore US supply chains.
Bottom Line
Growth in Latam is expected to slow but not collapse. Weaker wage growth will be a disinflationary pressure in the region. Central banks will largely be able to continue their easing cycles given the additional breathing room coming from the Fed and lower inflation. Global trade policy shifts offer both downside risks but also opportunities in the region, potentially inducing Latam to strengthen relationships with their trading partners. Downside risks include geopolitical tensions, lack of fiscal discipline and currency fluctuations.
Latin America Outlook Forecast - Q4 2025
Subscribe to insights from KPMG Economics
KPMG Economics distributes a wide selection of insight and analysis to help businesses make informed decisions.
Explore more
Insight
Global Navigator from KPMG Economics
Redrawing the global manufacturing map: Lowest cost manufacturing will give way to near-shoring.
Insight
KPMG Economics
A source for unbiased economic intelligence to help improve strategic decision-making.
Insight
Policy in Motion: Insights for navigating with confidence
Your resource for the latest on trade, tariff and regulatory policy changes.
Meet our team
