Latin America and the effects of the war in Ukraine: lower growth, higher inflation and labour instability

The war in Ukraine is having serious repercussions on the world economy and global growth is down one point on pre-conflict estimates
ART/Sergio Fabián Garzón Clavijo - Blanca y Janeth de la Asociación Damas Leche, con cerca de 40 mujeres trabajando, en Colombia

ART/Sergio Fabián Garzón Clavijo  -   Blanca and Janeth from the Asociación Damas Leche, with about 40 women working, in Colombia.

The economies of Latin America and the Caribbean face a complex conjuncture in 2022 due to the war between Russia and Ukraine, which opened a new source of uncertainty for the world economy and negatively affects global growth, estimated at 3.3%, one percentage point less than what was projected before the outbreak of hostilities. At the regional level, the expected lower growth will be accompanied by higher inflation and a slow recovery in employment.

According to new estimates by the Economic Commission for Latin America and the Caribbean (ECLAC), in the current context, where the conflict in Ukraine has exacerbated inflation problems, increased volatility and financial costs, growth is expected to average 1.8% for the region. South American economies are expected to grow by 1.5%, Central America and Mexico by 2.3%, while the Caribbean economies are expected to grow by 4.7% (excluding Guyana).

The new figures were delivered by the agency's acting executive secretary, Mario Cimoli, to the ambassadors of the Group of Latin American and Caribbean countries during a meeting at UN headquarters in New York on Wednesday. 

Tipti - Un trabajador en Ecuador, donde, como en el resto de América Latina, el comercio digital se ha convertido en un sector creciente
Tipti - A worker in Ecuador, where, as in the rest of Latin America, digital commerce has become a growing sector.
Trade affected by the conflict

According to ECLAC, world trade dynamics are also expected to be negatively affected by the conflict, leading to a decrease in external demand from Latin America and the Caribbean.

The region's main trading partners - the United States, China and the European Union - will see lower growth rates than expected prior to the conflict.

In the case of the United States, growth would be 2.8% (1.2 percentage points below the pre-conflict projection). For China, growth is projected at 5% (0.7 percentage points lower before the hostilities) and for the European Union, growth is expected to be 2.8% (1.4 percentage points lower than expected before the conflict).

The war in Ukraine also triggered an increase in commodity prices, mainly for hydrocarbons, some metals, foodstuffs, and fertilisers. This price increase comes on top of cost increases due to disruptions in supply chains and exacerbated shipping disruptions.

These increases have resulted in a boost to global inflation, which in some countries has reached record highs in 2022. With inflation persisting and rising, further interest rate hikes are expected in developed countries.

The regional commission of the United Nations adds that the monetary tightening in the countries of the North has accentuated the tightening of global financial conditions that had been observed in recent months, causing greater volatility in financial markets, which, together with the increase in global risk aversion as a result of the conflict in Ukraine, has damaged capital flows to emerging markets.

These trends could become more pronounced in the coming months, especially if inflationary pressures persist in developed economies, and central banks in these economies deepen contractionary monetary policies, including increases in monetary policy rates and the reversal of monetary stimulus (asset purchases).

ACNUR/Rubén Salgado Escudero - Una familia venezolana trabaja para reconstruir su negocio de confitería en Guatemala
ACNUR/Rubén Salgado Escudero - A Venezuelan family works to rebuild their confectionery business in Guatemala
Higher inflation for Latin America and the Caribbean

As in the rest of the world, inflationary dynamics in Latin America and the Caribbean have accelerated, warns ECLAC.

As of March 2022, regional inflation was estimated at 7.5%, and many central banks in the region anticipate that inflation will remain high for the remainder of the year, given the heightened uncertainty in the external environment that has been accentuated by the war in Ukraine, especially high international energy and food prices and disruptions in global supply chains, as well as persistently high transport costs.

In response to rising inflation, the monetary policy of the region's central banks has become more restrictive and most of them have raised interest rates significantly, in most cases reaching levels similar to those observed in 2017.

The withdrawal of the fiscal impulse is expected to accelerate in 2022, in line with the evolution of macroeconomic conditions and rising financing costs.

Public spending would contract, reinforcing the reduction observed in 2021, reducing the contribution of fiscal policy to growth.

Labour market also affected

Meanwhile, while labour markets show signs of recovery, it has been slow and incomplete.

By 2022, and in line with the expected slowdown in the pace of growth in the region, the pace of job creation is expected to slow.

The combined effect of higher labour participation and a slower pace of job creation will push up the unemployment rate this year, ECLAC warns.