IMF Regional Outlook: The Americas

By John Lavelle

The International Monetary Fund (IMF) serves many functions as the central financial institution of the United Nations, namely providing short term economic aid to nations, overseeing exchange rates, and monitoring the global economy.  Included in their role as monitors is distributing a bi-annual report called the World Economic Outlook where they reflect and predict on the economic health of the world, on a region by region basis. Recently, the IMF released the October 2021 edition titled Recovery During a Pandemic.  So what does the IMF, the organization that accurately predicted the Greek debt crisis and Great Recession over ten years ago, say about the Western Hemisphere and its future?  And how confident is the IMF in their forecasts for the next two years?

The best projections usually arise from past results and context, so that is where this story will start. Unsurprisingly, the world has been dominated by COVID and its effects over the past two years, and the 2020 numbers reflect that. The global economy, measured in real GDP, shrunk by 3.1% in 2020, the lowest ever recorded, nearly doubling the next closest relapse of 1.67% in 2009. The data proved to be worse for the Western Hemisphere, as the United States’ GDP dropped by 3.4% and Latin America’s fell by 7%

These figures are not unsurprising in hindsight.  The United States had its highest unemployment numbers for ten years and had very little consumer spending.  Latin America has had many more issues than  just high unemployment, as most of their countries had been some of the hardest hit by COVID and the Venezuela Crisis is still heavily affecting the numbers. 

A better way to look at this data is not in terms of dollars and rates, but in terms of time.  The United States was pushed back to its GDP in early 2018, while Latin America’s GDP is the same as it was in 2011, wiping out a decade of stable gains. 

A core reason why the GDP of Latin America fell so greatly was due to the 9.5% drop in GDP tourism—one of Latin America’s greatest areas of revenue—in 2020, as far fewer people were able to travel and spend money.  This effect was even more extreme in the Caribbean and the Andes’ nation.

 All nations in both continents saw a decrease in GDP except for Guyana (a 43.5% increase), with the Caribbean islands (9.5% decrease), Venezuela (30% decrease), and Panama (17.9% decrease) having the greatest declines.  Inflation is also another area of concern from the IMF, as many nations have experienced double-digit growth in 2020.  Most nations have chosen policies (low interest rates) that increase inflation in order to increase consumer spending.  Inflation is also being increased by the bottlenecking supply chain, which forces prices for goods to rise worldwide. However, many Latin American nations, notably Venezuela and Argentina, have had soaring inflation rates before COVID and are predicted to continue this trend in the coming years.  

In North America, the economic conditions were less extreme. Mexico has the worst change in GDP (8.3% drop) and highest increase in inflation (3.2%).  The central reason why is due to the great proportion of the service and production industries in North America, who were less impacted by COVID comparatively.

The IMF paints a clear picture of the Western Hemisphere in 2020: Most nations had economic setbacks, with Latin America receiving the worst of it. 

The IMF’s predictions about the future are far more positive, as the Fund expects most nations to bounce back and have improved GDP rates in 2021 and 2022. Typically, the countries with the worst rates in 2020 had some of the best in 2021.  This list includes such nations as The Bahamas, Aruba, Peru, Chile, and Belize, each with predicted rates of over 8%.  Guyana is expected to continue their growth with a 20% rise in 2021.

The IMF attributes three main causes for this increase. Predictably, both are due to the diminishing COVID pandemic.  The first is tourism, as many citizens of the world look to travel as restrictions ease and desire to leave home for the first time in months.  The second is from increased industry and productivity from exporting raw and finished goods, driving up exports and investment.  Finally, more consumer spending is expected with a lower unemployment rate and more businesses being open.

North America is expected to follow a similar pattern.  Canada, Mexico, and the United States will have a greater GDP in 2021 than 2020, with all rates increasing by around 6%.   The causes for this rebound are lower rates of unemployment and high wages per capita.  The IMF also lists greater tourism as a significant factor, but not as great as Latin America’s.  

The IMF’s predictions and analysis align with most other economists’ thoughts and findings.  The Western Hemisphere, along with the rest of the world, will ‘bounce back’ economically from COVID-19.  However, there is one cause of hesitation that the IMF, with many prominent economists, have:Inflation.

Inflation is the rate of increase in prices over time. From inflation, stats such as $10 in 1800 is worth $217.71 today arise.  Typically, inflation increases at a rate of 2% annually in developed economies.  This is not considered a major cause of concern as it prevents the Paradox of Thrift, where consumers hold off buying goods in hope for a better deal. However, high inflation, called hyperinflation, can destroy an economy, as seen in Venezuela and Zimbabwe.  Now, the projections for most countries are nowhere near thousands of percent seen in cases of hyperinflation.  Most countries are projected to have inflation rates ranging from 3% to 12% with little correlation in regards to region. South America has the highest average projection at 15%, but this is due to an extreme bias (excluding Venezuela the rate is 9.7%), while the CAPDR nations are at a relatively low 4.2%. For reference, North America as a whole is expected to have a 5.1% rate of inflation, with the United States having the largest at 5.9%.  The highest projections are from Venezuela and Suriname.  Where Venezuela has had high inflation long before COVID, the Suriname rates are due to an excess in money creation from the Central Bank in 2020. But why are these rates so concerning for the IMF, especially when they are nowhere near hyperinflation levels?

Higher inflation, as a whole, is bad for the consumer as it erodes their purchasing power and reduces savings and wages.  Its effects on economies are equally serious, as economic growth, stability, and investment are greatly lower. However, the central reason why inflation scares the IMF and many others is due to the choice between inflation and recession.  As stated previously, high inflation can wreak havoc on individuals and economies, but the cure might be worse than the disease.  All government actions to control inflation can lead to a recession or depression.  The most common tools are implementing wage and price controls, increasing taxes and interest rates, and reducing money supply.   

The ‘solutions’ often lead to greater unemployment and lowering stock prices. So now the Central Banks of these nations must walk a careful line between inflation and recession, and one wrong policy could ruin the economy with stagflation.  This is the sole cause of concern (besides another possible COVID outbreak) the IMF gives for North and South America, as well as the rest of the world. 

This IMF biannual report reiterates many points about the Western Hemisphere’s economies.   Many nations were greatly negatively affected by COVID and its accompanying unemployment and reduction in consumer spending.  The Latin American economies suffered to a greater extent due to its greater reliance on tourism and a great amount of COVID cases and deaths.  However, it is expected that most economies will rebound in the coming years as the world emerges from COVID with a high growth rate in GDP.  The one cause for concern is the rising inflation most nations are facing and what their central banks will do to combat it.  The future looks bright, but is still nevertheless uncertain. 

The views expressed in this article are the author’s own, and may not reflect the opinions of The St Andrews Economist.

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