Covid-19 Hits Latin American Economies

May 6, 2020

Latin America: Covid-19 Brings Economic Woe, writes Andrew Harker, Economics Director, Economic Indices, IHS Markit

The economic prospects of Latin American countries have suffered a severe blow due to the global coronavirus disease 2019 (Covid-19) pandemic, which at the time of writing shows no signs of abating and looks set to result in a global economic recession. The disease, and efforts to contain it, are already starting to take a heavy toll on the region’s economies.

The latest IHS Markit PMI data highlight the impact the virus has already begun to have on the economic performance of Latin American countries, with manufacturing data for April showing new orders falling sharply amid declining demand at home and abroad, production being scaled back and business confidence slumping. Forecasts made towards the end of last year, such as the International Monetary Fund’s (IMF) World Economic Outlook, had to be revised sharply lower in April, with dramatic GDP falls now the norm and unemployment expected to rise. The region’s central banks have acted swiftly to offer support to their respective economies, and in particular their ailing currencies, with widespread interest rate cuts enacted. However, much greater support is going to be needed during 2020 and beyond.

Argentina

The Covid-19 pandemic is set to bring further woe to the already-struggling Argentinian economy. Even before the outbreak, the IMF was predicting another year of falling GDP, but with the global economy set to enter recession the prospects now look even worse.

In contrast to some other Latin American countries, the Argentinian government prioritised the fight against Covid-19 early on and ordered strict measures to try to prevent the spread of the disease. This will inevitably lead to economic disruption initially but will hopefully mean an earlier victory over the virus. The Central Bank of Argentina continued to loosen monetary policy in March, cutting rates for the eighth time since mid-December. That said, they still stand at 38%.

Brazil

The prospects of the Brazilian economy seeing growth of GDP in 2020 appear to be waning as the Covid-19 outbreak hits global demand and is likely to harm business conditions in Brazil as well. The IHS Markit Brazil Manufacturing PMI signalled the first decline in the health of the sector for eight months in March, followed by a collapse in April. Central to the deterioration was a renewed contraction in new orders, with the pace of reduction the most marked since January 2017. Production also fell, while firms scaled back employment to the greatest extent in just over three years.

The IHS Markit Brazil Manufacturing PMI signalled the first decline in the health of the sector for eight months in March, followed by a collapse in April…

The Central Bank of Brazil has acted in the face of a sharply depreciating currency and fears of economic recession, cutting interest rates by 50 basis points to a new low of 3.75% and intervening in the foreign exchange market as diminishing risk appetite across global markets saw investors flock to the US dollar. Currency depreciation has caused inflationary pressures to build in the manufacturing sector. According to the IHS Markit PMI data, manufacturers saw the sharpest rise in their purchase costs for around a year-and-a-half and primarily linked this to exchange rate factors. Subsequently, firms raised their own selling prices at the fastest pace since September 2018. The combination of weakening demand (both at home and abroad), and building inflationary pressures reinforces the view that difficult times lie ahead.

Colombia

The COVID-19 outbreak looks set to throw the Colombian economy off course during 2020. In March data from the Davivienda Colombia Manufacturing PMI, compiled by IHS Markit, showed that manufacturing production decreased for the first time in nine months during March amid the sharpest reduction in new orders for almost three years. Meanwhile, business confidence dropped to the lowest in the eight-year series history, with firms worried about the potential for an extended economic downturn. That was followed in April by Colombia’s lowest-ever PMI score.