Growth in Latin America ticked up in 2024 on the back of some of the strongest trade flows in decades. According to the Economic Commission for Latin America and the Caribbean (ECLAC), GDP growth reached 2.2% last year and is likely to pick up to 2.4% in 2025. But while this is double the annual growth rate of the past decade, it is barely keeping up with the population growth rate, leaving the region facing relative stagnation in terms of GDP per capita.
The region’s economies are also facing a number of substantial challenges, including the potential impact of the new administration in the US as well as the effect of a potential slowdown in China.
Highlights
US-China tensions could impact LatAm growth
Local bonds will outperform
Economic instability will undermine equities
Liberal policy reforms will be scarce
Lower inflation should reduce cost of capital
Since China joined the WTO, LatAm commodity exporters have gradually shifted their focus toward the Asian industrial giant and away from the US, making the region—especially Chile, Peru and Brazil—more dependent on China’s economy, and more vulnerable to a slowdown there.
The looming trade war between the US and China threatens to exacerbate the risk to Latin America, potentially sapping trade and investment from the US into China and diminishing China’s growth potential, and hence its appetite for commodities.
Until recently, there was a consensus that the US economy would strengthen, offsetting some of the negative impact from China’s travails. As well as still being the second most important export destination for most countries in Latin America—and the main one for Mexico and Colombia—the US remains the rich source of financing and foreign direct investment into the region.
As recent sharp gyrations in US equities have illustrated, concerns are emerging that US growth might fail to live up to expectations.
Playing a weak hand
The knock-on effects for Latin America could be severe. The region’s economic growth has been lagging the rest of the world over the past few years. Even growing at the 2.4% expected for 2025, it will be underperforming the rest of the emerging world and the fastest growing developed markets.
But stronger growth is essential for supporting political stability. Stagnation of Latin America’s GDP per capita and the fact that the region has a predominantly young population have led to growing poverty and inequality and, inevitably, political instability.
Most countries in the region lack the institutional framework required to sustain a pro-growth environment. The political systems in countries such as Ecuador, Argentina and Peru, for example, are dependent on an unstable balance of political forces between the executive power and an opposition parliament.
In Mexico and Colombia, many institutions have already been undermined by populism.
In this environment, there is little room for liberal policy reform—or any meaningful reform at all—while the world is changing quite rapidly in response to geopolitical, climate and technological challenges.
A question of timing
Fortunately, even if tensions between the US and China escalate, local authorities in Latin America would have some room to maneuver and moderate its effects in the short term. If the confrontation is prolonged, however, the region’s growth potential is likely to fall.
That could put pressure on local currencies, especially if slower growth prompts central banks to cut short-term interest rates. The declines would be exacerbated by strong capital outflows in response to increased political instability, pushing LatAm currencies to depreciate further.
On the fiscal side, governments are generally expected to maintain an expansive stance despite carrying large fiscal deficits in many cases. As a whole, the region is not expected to experience significant improvement on this front, with fiscal deficits ranging between 2.5% of GDP in Chile and 7.5% of GDP in Brazil.
Public spending might help mitigate the impact on short-term growth of a less favorable external environment, but central banks will face pressure to keep long-term interest rates high, potentially hampering growth.
Those higher long-term rates might attract some easy money to the domestic bond markets, however, in part because rates in the region will likely end the year substantially above those in the developed world.
What is also likely, unfortunately, is that the unfolding trade war between the US and China and between the US and Latin American nations will endanger even the moderate progress attained in 2024, undermining the case for investing in Latin American equities and currencies. Much will depend on the tack the White House takes—and how Latin American leaders respond.
José is founder of Sothys Capital, an investment management firm providing innovative, bespoke solutions for institutional investors and high net worth individuals in LatAm capital markets
José is founder of Sothys Capital, an investment management firm providing innovative, bespoke solutions for institutional investors and high net worth individuals in LatAm capital markets
