The year began with strong expectations for the global economy. After years of slower growth, Latin America is facing a period of optimism, but without losing sight of the global tensions caused by the arrival of Donald Trump to the U.S. presidency.
By Valora Analitik for Grupo SURA*
The economic outlook for Latin America for 2025 shows a moderate growth in terms of Gross Domestic Product (GDP), this swayed by various macroeconomic factors. Domestic factors include the fiscal and monetary policies adopted by countries throughout the region, as well as current trends with inflation and unemployment rates. As for external factors, the price of raw materials and international capital flows are playing a determining role.
Multilateral organizations such as the World Bank (WB), the International Monetary Fund (IMF) and the Economic Commission for Latin America and the Caribbean (ECLAC) have published their forecasts that, while showing cautious optimism regarding GDP growth, also warn about persisting structural challenges and the need to implement reforms to promote sustainable and inclusive economic development.
An additional factor of uncertainty is the potential impact of the new U.S. government's economic and trade policies. The effects on the region have not yet been fully gauged.
Nevertheless, according to the World Bank, growth in Latin America and the Caribbean is expected to accelerate to 2.5% in 2025 and 2.6% in 2026, as interest rates normalize and inflation declines. This is after growth in Latin America and the Caribbean slowed to 2.2% in 2024, according to this multilateral organization, thereby reflecting a decline in consumption. Brazil showed a sound performance, while Mexico experienced a marked slowdown.
The World Bank underscored the fact that the region did begin on a positive footing, including interest rate cuts throughout almost the entire continent, with the exception of Brazil and Mexico, the largest regional powers. The slowdown with China's demand had a consequent impact on the region´s exports, while Argentina's trade surplus increased due to lower imports.
Meanwhile, the IMF notes that, after successfully weathering a series of shocks, most countries in the region are converging towards their potential growth. Consequently, it forecasts that economic activity in Latin America and the Caribbean will accelerate to 2.5% by the end of 2025.
As for the largest countries in the region, the IMF maintains its 2.2% growth forecast for Brazil, raises Mexico's by one tenth of a percent (1.4%) and expects a strong rebound with Argentina's economy (5.0%) after the 2024 recession.
The IMF acknowledges that the main concern regarding Latin America´s ‘ overall economy is inflationary pressure in Brazil, which led its Central Bank to raise interest rates to 12.25% in an attempt to contain prices.
ECLAC projects that in 2025 South America will grow by 2.6%, Central America by 2.9% and the Caribbean by 2.6%. These figures reflect a slight improvement over previous years, but still indicate a modest rate of growth compared to other regions of the world. Overall, Latin American GDP is expected to expand by 2.4% by the end of the year.
"To address the trap of low-capacity and growth, it is necessary, on the one hand, to increase the ability of Latin American economies to mobilize their financial resources effectively and, on the other, to strengthen their productive capacity in the medium and long term, by adopting productive development policies aimed at increasing productivity," stated the Commission's Executive Secretary, José Manuel Salazar-Xirinachs.
Inflation, monetary policy and unemployment throughout the region
Inflation has been a constant concern in the continent. Although forecasts are showing a downward trend, the deflation process will be gradual. The IMF stresses that, although inflation is expected to continue to decline, this process will be gradual, which implies that monetary authorities will have to maintain a vigilant and possibly restrictive stance for a longer period of time.
In Chile, for example, the government has adjusted its annual inflation forecast upward from 4.2% to 4.7%, in view of the higher increases during the first few months of the year. This situation led the country´s Central Bank to pause its cycle of rate cuts, evidencing the caution with which its monetary authorities approach inflationary pressures. Similarly, the Board of Directors of Colombia’s Central Bank decided by a majority vote to maintain its monetary policy interest rate unchanged at 9.5%, thereby pausing the cuts that had been taking place since October 2023.
ECLAC agrees that inflation in the Latin American and Caribbean economies has shown a downward trend. After peaking at 8.2% in 2022, regional inflation declined to 3.7% in December 2023, and the final data for 2024 is expected to show a drop of 3.4%.
However, although the regional Consumer Price Index (CPI) has approached the central value of the targeted range of many central banks (3%), the agency warns that the forecast level for 2024 is still higher than the values recorded before the pandemic.
On the fiscal front, "it would be difficult to raise tax revenues in the short term, while public spending would remain stable in the face of a growing debt service burden. Consequently, risks are arising to fiscal sustainability, this linked to weak GDP growth, high financing costs and exchange rate fluctuations," ECLAC points out.
On the other hand, the Latin American job markets, in spite of a slight recovery in job creation, continues to face significant challenges. As for informal employment, the average regional employment rate in this regard is expected to stand at 46.7%, which would mean a decrease of 0.4 percentage points compared to the rate recorded in 2023.
"Despite this slight reduction in informality, significant challenges persist throughout the region in terms of formalizing employment, which underscores the need to implement effective policies that promote safer, more stable working conditions," ECLAC notes.
These conditions limit the potential for economic growth and hinder the reduction of poverty and inequality, making it imperative for countries to implement policies that encourage the formalization of employment and promote the inclusion of vulnerable groups in the job market.
Breakdown of the Outlooks for Chile, Colombia and Mexico
In Mexico, scenarios are beginning to become more complex given Donald Trump's 25% tariff threat on all imports. Fitch Ratings points out that, should this be the case, the impact on the Mexican economy would be greater, leading to a recession this year and a more severe drop in GDP for 2026.
"If implemented, the 25% across-the-board tariff would have a much greater impact, likely causing a recession in Mexico in 2025 and reducing the country's output by 3.0 percentage points for 2026," this ratings agency warns.
Fitch Ratings breaks this down further by warning that tariff increases could weaken domestic confidence, creating an impact that would be difficult to prevent, and while currency depreciation would provide exporters with some protection from tariffs, it would also make their input costs more expensive.
On the other hand, Chile´s Central Bank has revised its economic growth estimate for 2025 to 2.5%, slightly higher than the 2.4% recorded in 2024. This adjustment is attributed to a significant recovery in investment, with gross fixed capital formation increasing by 3.9% year-on-year.
The Chilean Issuer has remarked on "higher public spending and a stronger external sector push all of which is offset by lower expected momentum for household and business spending," according to its year-end 2024 Monetary Policy Report.
Colombia faces similar challenges as for Chile, with moderate growth expectations and persistent inflationary pressures. The country´s economic authorities and government are focused on implementing structural reforms to boost productivity and competitiveness, while seeking to maintain macroeconomic stability amidst a political environment of uncertainty.
BBVA Research points out that the Colombian GDP shall grow by 2.5% in 2025 and 3.2% in 2026, this driven by private consumption in durable and semi-durable goods and services and by fixed investment in infrastructure, machinery and housing. Meanwhile, Bancolombia, in its February Nowcast economic indicator report, underscores the fact that the country's economy began the year in expansionary territory, but with a notably lower dynamism. Thus, for the moving quarter ending January 2025, the Gross Domestic Product (GDP) could reach an year-on-year increase of 0.9%, according to the estimates contained in this report, which would signal a shift in trend compared to December 2024.
A look at global geopolitical tensions
Global geopolitical tensions, such as the trade war between the U.S. and China will have direct repercussions on Latin American economies, mainly with regard to important trade partners such as Mexico, as described in more detail in some of Fitch Ratings' forecasts and observations.
Uncertainty on the international markets may affect the region's exports, especially in sectors dependent on the demand from its main trading powers. At the same time, China's subdued growth could limit demand for the region's main commodities.
Furthermore, volatility in terms of commodity prices, given international conflicts and sanctions, may create additional inflationary pressures in commodity exporting countries. This shall force monetary authorities to balance the need to control inflation with stimulating economic growth.
Therefore, Latin America faces a 2025 with moderate growth prospects, accompanied by significant challenges in terms of inflation and employment. Forecasts on the part of multilateral organizations suggest a gradual recovery, but it is essential that countries throughout the region implement structural reforms that boost productivity, promote labor inclusion and strengthen resilience in the face of global geopolitical tensions.
*This article was prepared by the Valora Analitik staff for Grupo SURA. Its content is of a purely journalistic nature and does not compromise any specific positions taken or recommendations made by our Organization.
