Regional Outlook: Latin America

Growth in Latin America (Latam) is expected to pick up in 2025 to 2.6% after a tepid 1.6% year-over-year in 2024¹. Andean economies like Chile and Peru will be outperformers in the region in 2024 due to high copper prices for producers, lower domestic inflation and lower interest rates, while countries like Argentina, Mexico and Brazil are driving the slowdown this year. Argentina has lowered inflation by triggering a deep recession; it will still need to absorb delayed exchange rate adjustments. Latam inflation in general is still at the high end of most countries’ target inflation ranges as it grapples with higher services inflation and recent or prospective minimum wage increases in Brazil, Mexico, Colombia and Chile.

Central banks in Latam were quick to raise rates and tame inflation. As a result, many central banks including Banco Central de Chile (CBoC), Banco Central do Brasil (BCB), Bank of Mexico (Banxico), Colombia’s Banco de la República (BanRep) and the Banco Central de Reserva del Perú (BCRP) have already begun to cut rates and stimulate their economies. The challenge for these central banks is the uncertainty surrounding the Federal Reserve (Fed). The reserve currency status of the US dollar means that cutting too far ahead of the Fed can lead to large swings in currency; as markets have pushed back expectations of a Fed cut to December, that has increased yields in treasuries and devalued other currencies. The Mexican peso and Brazilian real, among other currencies, have already depreciated and could do so further if commodity prices fall later in the year. We expect that, rather than reverse course, central banks in Latam including Banxico, BCB, BanRep and BCRP will slow their pace of cuts or even halt to allow the Fed to begin its easing cycle. That could stave off depreciation in their currencies without risking overtightening.

Investment in Latam has taken off, with both Brazil and Mexico being among the top recipients of foreign direct investment in 2023 according to the OECD. Mexico has been a main beneficiary of nearshoring and friendshoring trends due to benefits in the US-Mexico-Canada (USMCA) free trade agreement. Some of that investment may be held back in 2024 and 2025 as the US, Canada and Mexico prepare for the review process of USMCA in July 2026. If the agreement is not approved at the review, that could set off a process to make expiration of USMCA much more likely.

Because Latam has become increasingly crucial for global supply chains, disruptions will be closely monitored in the region. While the drought in the Panama Canal has likely come to an end, other disruptions in the form of the catastrophic flooding of the Rio Grande do Sul in southern Brazil, Mexico City water shortages, farmers’ strikes in Colombia and border closures between the US and Mexico at key pinch points (i.e., the Eagle Pass rail crossing) could reverberate more through the economies of these countries and into the global economy.