Multiple Factors Increase the Downward Pressure on the Latin American Economy

Under the influence of multiple factors such as the global economic growth slowdown, high inflation rates in major European and American countries, and the spillover effect of the Fed's interest rate hike, Latin America's major economies have seen rising inflation rates, significant depreciation of local currencies, and obvious expectations of capital departures, increasing economic downward pressure in the short to medium term.

Driven by foreign trade, Brazil's gross domestic product (GDP) grew by 1% in the first half of this year and is expected to grow by 0.7% in the second half of the year. The market generally predicts that 2023 will be a very difficult year for the Brazilian economy due to the gradual emergence of the negative impact of temporary economic stimulus measures and the lack of government policies to promote employment.

In the first half of this year, exports drove Argentina's GDP growth by 6% in the first quarter, and the country's central bank expects to achieve 3.2% growth for the whole of 2022. The World Bank and the International Monetary Fund forecast that its economy will grow by 4% to 4.5%. However, Argentina's economic outlook is not optimistic in the short to medium term due to high external debt and a severe depreciation of the local currency.

Chile, another major economic power in South America, continues to see economic activity shrink this year, and the country's central bank expects economic growth of 1% to 1.8% for the year, but zero growth or even negative growth in 2023. Chilean economists believe that the country's economy has stagnated.

Bilbao-Biscaya Bank estimates that Mexico's economy will grow by 2% this year, a significant slowdown compared to the 4.8% rate in 2021. The bank also lowered Mexico's growth forecast for 2023 to 1.6% from 2.1%, citing a continued contraction in private consumption and investment going forward in an environment of high inflation and tightening monetary policy.

Economists generally agree that high inflation and the depreciation of the local currency against the U.S. dollar are the main risks currently facing major Latin American economies, including Brazil and Argentina, and that the risk is brought about by the spillover effect of the Federal Reserve's interest rate hike.

Victor Salas, an economist at the University of Santiago in Chile, pointed out that the Fed's rate hike in mid-June triggered a plunge in the price of copper, Chile's main export product. He pointed out that the Fed's actions made the world worried about the recession, causing commodity prices to "fall beyond expectations."

Argentina's University of Buenos Aires economics professor, Hernan Bergstein, believes that the Federal Reserve's approach to global interest rate hikes, whose impact on Argentina and other peripheral countries is particularly serious, will cause investment withdrawal, thereby limiting economic growth.

Guadalajara Christian University's Sergio Negrete believes that the Fed's interest rate hike caused a large outflow of capital from emerging markets. The United States is Mexico's neighbor and major business partner, Mexico's foreign trade is heavily dependent on the United States. The Fed rate hike will lead to a reduction in Mexico's exports to the United States, and may even lead to the Mexican economy entering into recession.