Latin America has regained the amount of production lost due to the pandemic and is expanding at an excessive rate, according to Moody’s research on economic behavior in Latin America.
The report indicates that the Latin American economy is operating with a positive output gap, which explains the virulent inflation. The continuance of the positive gap will make it more difficult for core inflation to quickly converge to its objective, implying that central banks would have to maintain tight monetary conditions to keep their economies cool in order to assure inflationary convergence.
It indicates that the pandemic hit the region hard in 2020, with the regional economy contracting 15% by the middle of that year. The impact was different for each country, depending largely on the conditions of the health systems and the policy response of each country.
The impact
Peru experienced the worst economic decline in the second quarter of 2020, with a 27% decline. Mexico saw a 19% economic recession during the same period, followed by Argentina and Colombia with declines of 18%. Brazil and Chile were only affected to a lesser extent because their governments quickly responded with mitigating measures; these two nations only reported an economic drop of 11%.
Likewise, the recovery process advanced at different speeds, with Brazil, Chile, Colombia, and Peru leading the way and recovering the lost product towards the beginning of 2021. Mexico was not able to recover its lost product until the third quarter of 2022.
By the end of 2022, the seven largest economies were already expanding, and production processes were running above potential. To put it another way, these economies were experiencing overheating and creating a positive production gap.
The firm’s researchers maintain that “an economy develops a positive gap when production is overstimulated by an excess of internal demand, for which reason the economy advances at a speed greater than the natural productive capacity.
They point out that, given the unexpected shock generated by the pandemic, the main Latin American currencies depreciated.
Although the Mexican economy was not the most affected, its slow recovery was largely the result of poor mitigation policies implemented by the government. The Mexican economy only began to expand in the third quarter of 2022, a year after the second group of leaders, such as Colombia and Uruguay.
Thus, Latin America’s prolonged inflation was caused by their economies’ overexpansion, which was fueled by excess demand, resulting in the extension of the Latin American central banks’ expansive monetary policies.
