Inflation and Covid-19 Restrict Latin American Growth

Pollyanna De Lima, Economics Associate Director, Economic Indices, IHS Markit, crunches the latest PMI numbers and finds that short-term growth in the region faces headwinds...

The economic landscape for Latin America has changed considerably since the last issue, and near-term prospects are tilted to the downside amid inflationary pressures and further COVID-19 disruption. Third quarter official GDP data, published towards the end of 2021, highlighted contractions in Brazil and Mexico. Colombia posted robust growth as the country bounced back from national strikes earlier in the year. Meanwhile, manufacturing PMI data showed reductions in Brazilian manufacturing production throughout Q4, a trend that was likewise recorded in Mexico. Expansions were registered in Colombia, albeit with growth easing in each of the last three months of the year.

IMF full-year GDP forecasts for 2021 were little-changed for Brazil (+5.2%) and Mexico (+6.2%), with an upgrade for Colombia (+7.6%). Growth is then expected to soften across these three nations in 2022, to +1.5%, +4.0% and +3.8% respectively. These estimates were, however, published in October and are likely to be altered downwards considering the rise in COVID-19 cases in late-December.

The escalation of the pandemic and the possibility that new variants will emerge are among the key threats to the outlook. Mounting price pressures remain a concern, as do supply-chain disruptions and issues with transportation. With central banks tightening monetary policy in response to elevated inflation, consumption and investment will likely be restricted by rising borrowing costs.


Brazil entered a technical recession in the third quarter of 2021 as an unprecedented drought severely affected the agricultural sector. Industrial output was stable, while services activity expanded. For the final three months of the year, PMI data pointed to a modest upturn in private sector output, but trends diverged at the sector level.

The escalation of the pandemic and the possibility that new variants will emerge are among the key threats to the outlook

Service providers reported substantial gains in new work throughout the final quarter of 2021, which underpinned marked increases in business activity and employment. Manufacturing production contracted, owing to a combination of supply- and demand side problems. Panellists continued to signal difficulties sourcing raw materials and transporting goods, while demand reportedly weakened due to mounting price pressures and rising interest rates.

After rising in November, PMI input price indices receded in December. That said, rates of inflation were among the strongest in their respective series histories for manufacturing, services and composite. Survey participants reported higher prices for energy, fuel, several raw materials and transportation. Such increases were often attributed to real depreciation and supply-chain constraints. Additional cost burdens continued to be transferred to consumers.

To tame inflation, which reached 10.1% in 2021, Brazil’s central bank continued with its aggressive monetary policy tightening, hiking the benchmark SELIC rate to 9.25% in December.

The IMF predicts year-end consumer prices to slow to 4.0% in 2022. GDP is anticipated to grow +5.2% in 2021, +1.5% in 2022 and +2.0% in 2023. The unemployment rate is expected to be at 13.1% in 2022.


In line with signs of strengthening economic conditions in the third quarter, from manufacturing PMI data, GDP grew +5.7% from Q2. Survey measures remained in expansion territory during the fourth quarter, but growth moderated due to lingering supply-chain issues. December saw the weakest rise in manufacturing output in the current six-month sequence of expansion, despite a pick-up in sales. Colombian goods producers continued to purchase additional inputs as part of attempts to prevent future stockouts, while jobs were created for the sixth month in succession. Official data likewise pointed to improving labour market trends, with the unemployment rate falling from June through to November. At 10.8%, the latest reading was the lowest since December 2019.

In its latest World Economic Outlook, the IMF reported predictions of GDP growth of +7.6% for 2021, +3.8% in 2022 +3.3% in 2023. Consumer price inflation is anticipated to slow to 3.1% in 2022 and then 3.0% in 2023.

PMI data for November highlighted unprecedented increases in both input costs and output charges among goods producers. Rates of inflation softened in December, but remained historically elevated. Companies linked rising cost burdens to global shortages of raw materials and greater transportation prices.

To curb inflation, the central bank lifted the benchmark interest rate for the third month running in December, from 2.5% in November to 3.0%.


Following four successive quarters of growth, GDP contracted by -0.4% in Q3. For the final quarter of the year, manufacturing PMI data pointed to ongoing declines in output, factory orders, exports and employment.

Anecdotal survey evidence indicated that demand for goods was restricted by the pandemic, challenging market conditions and diminished client requirements at the end of the year. Subsequently, firms continued to trim production volumes. In some instances, the fall in output was linked to raw material scarcity. Fewer production requirements continued to translate to job cuts across the sector, December’s being the fastest in seven months. With input supply problems persisting, cost burdens rose at the third-fastest rate since data collection started in April 2011.

Consumer price inflation in Mexico was at 7.4% at the end of 2021, the highest in 21 years and well above Banxico’s upper-limit target of 4.0%. Concerns over inflation expectations led to another interest rate hike in December, up to 5.5% from 5.0% in November.

The IMF expects inflation to ease to 3.1% in 2022, while GDP growth is forecast to soften from +6.2% in 2021 to +4.0% in 2022.