Mexico City — The main risk for Latin America’s economies in the second half of 2023 comes from the north: recession in the United States, and the US economy will most likely enter recession in the second half of the year, when a combination of weaknesses in manufacturing and the services sector is expected, according to Elijah Oliveros-Rosen, Latin America lead economist at S&P Global Ratings.
He explained that the US recession forecast is made based on a Federal Reserve model that calculates the probability of economic contraction, and considering that the labor market has shown strength, that leaves the door open for the central bank to apply an increase of more than 25 basis points.
“The main risk for Latin America comes from outside, and it is what happens in the US economy, our expectation is that it will enter into recession, the question we have now is how deep it will be, and not whether there will be a recession or not.”Elijah Oliveros-Rosen, Latin America lead economist at S&P Global Ratings.
A deep US recession would have a big impact on global demand and risk aversion, which would have a negative impact on issues such as rates, capital flows in the region and fixed investment, said the economist during the webinar LATAM Macroeconomic Outlook and Challenges for the Financial Sector in Colombia, held on Thursday.
Oliveros-Rosen said that Latin American will grow 3.6% in 2022, above its potential of a range of 2% to 2.5%, while for 2023, economic growth of 0.9% is expected.
When asked which country has the best economic prospects, he responded that Mexico is the nation that stands out due to several factors: global conditions of high rates, some structural changes such as nearshoring, and the energy transition.
Is Latin America ready for rate cuts?
With the cyclical adjustment in demand, he said there will be a decrease in inflation, and that in the last two or three months core inflation has started to moderate, which is a positive sign and a signal that central banks in the region want to see in order to decide whether to stop rate hikes or start cutting rates.
Chile and Brazil were the first in the region to lower rates due to inflation and low growth, and the market has already discounted rate cuts. In Chile, a cut of 25 basis points is already discounted in the next three months, and in Brazil the market is already discounting almost 100 basis points of cuts in the next 6 months.
In the rest of the region, the market is divided as to when central banks will start cutting interest rates.
In the case of Mexico and Colombia, Oliveros-Rosen believes that central banks are most likely to start cutting rates in early 2024, although if there are signs of significant weakness in the US economy, a recession perhaps a little deeper than the market sees, they could cut interest rates as early as the fourth quarter of the year.