Global economic shocks are rarely unidimensional. They often come in layers of impacts, interacting and reinforcing one another.
The war involving Iran is a clear example. What began as a geopolitical conflict is now a compound supply shock. Energy prices are rising. Supply chains are tightening. Fertilizer markets are under pressure. These forces are moving at once, affecting inflation, growth, and external balances of countries around the globe.
Latin America and the Caribbean has shown resilience so far. That reflects years of improved economic management across much of the region, which helped countries enter this period in a more stable position.
So far, growth forecasts for Latin America and the Caribbean have remained broadly stable since the start of the conflict. Labor markets are also holding up, with unemployment near 6% — the lowest level in more than a decade.[1] Investor sentiment has remained relatively steady as well, with sovereign spreads about 219 basis points for the median economy, below pre-shock levels.[2]
The region also entered this shock with real buffers. Around 60% of electricity generation in Latin America and the Caribbean comes from renewable sources — about double the global average. That helps reduce direct exposure to oil-price shocks.
Resilience Is Not Immunity
Yet resilience does not mean immunity. This shock is significant, and it may last. Even where the immediate impact has been manageable, a weaker global environment could gradually weigh on the region. Debt levels remain high, borrowing costs have increased, and uncertainty continues to place pressure on financial conditions. Compounding this, the region enters this period with weak long-term growth, averaging about 1% per year over the past decade.
Where the Shock Hit — and Where the Region Held
The shock, channel by channel.
What moved, and what held, three months into the shock.
| Where the Shock Landed | ||
| Surged | Crude oil prices | Roughly +50% vs. end-January |
| Ticking up | Food prices | Fastest in import-heavy Central America & the Caribbean |
| Edging up | Headline inflation | Re-accelerated by less than 2 pp |
| What Has Held | ||
| Held | Exchange rates | Appreciated up to ~8% (Costa Rica, Brazil) |
| Held | Sovereign spreads | ~25 bps tighter on average; up to ~45 bps |
| Held | Core inflation | No pass-through from the headline pulse |
| Held | Real activity | Brazil & Mexico ~0%, Peru & Chile 3–4% y/y |
| Held | Equity markets | Net flat after a 4–9% February rally |
Source: Latin Macro Watch (LMW), IDB
One transmission channel deserves particular attention: food prices. As energy and fertilizer prices rise, food prices tend to follow, often building over time and with a lag of up to one year. Natural gas, which moves closely with oil prices, is the primary input for producing nitrogen fertilizer, so an energy shock quickly becomes a food-production shock. The effect is stronger in more import-dependent economies. This is already visible, as food inflation has increased across most of the region, except in Southern Cone countries, which are key food producers.
Higher Prices are Concentrated in Food and Fuel — Not Economy-Wide
Food prices show the clearest post-shock signal across Latin America and the Caribbean.
Food CPI year-on-year percentage change by region, simple cross-country average. Argentina, Venezuela, Haiti, and Suriname excluded.
For low-income households, this poses a major risk. Food makes up a large share of their spending, so higher prices can quickly erode purchasing power and push more families into poverty — rising by about 0.3 to 0.8 percentage points.
Policy Priorities
The policy choices made now will determine how the shock is absorbed at the macroeconomic level and how much it may affect the most vulnerable. The policy response should be temporary, targeted, and fiscally responsible to protect growth, support economic security, and build resilience.
Three policy priorities stand out:
1. Protect poor and vulnerable households
The response should rely on targeted support. In this context, protecting poor and vulnerable households is the first priority.
Well-designed cash-transfer systems can be scaled up quickly to reach those most affected. Automatic stabilizers like unemployment insurance can play an important role in cushioning the impact. Latin America and the Caribbean stands out globally as a pioneer in the design and implementation of cash-transfer programs. These systems provide an important foundation for responding quickly to shocks and reaching the households most affected.
At the IDB Group, we are supporting countries to strengthen these systems by improving targeting, expanding coverage, and ensuring they can respond quickly when shocks hit. The IDB Group comprises the IDB, IDB Invest and IDB Lab.
2. Maintain discipline under pressure
The shock is too large for public budgets to absorb.
Poorly designed measures can weaken fiscal positions, distort incentives, and reduce productivity. Broad subsidies, for example, are costly, with most benefits going to those who do not need support. Flawed emergency measures can weaken human capital and productivity, much like when the shift to online classes led to learning losses for those without adequate access to technology.
As governments face pressure to act quickly, the guiding principle should be clear: do no harm. The objective is a policy mix that stabilizes today without undermining tomorrow.
At the IDB Group, we are providing policy support to help countries navigate this shock without reversing hard-earned gains.
3. Structural response: diversify and enhance supply
This is not a one-off shock. Global disruptions are becoming more frequent, more complex, and more interconnected. Reducing vulnerability requires more than temporary relief. It requires structural action to diversify supply, secure key inputs, and strengthen the region’s ability to respond to future shocks.
Several vulnerabilities stand out. Latin America and the Caribbean is a major food producer, yet it remains dependent on imported fertilizers. Fertilizer-price shocks alone can reduce growth by up to 0.16 percentage points and raise inflation by around 0.3 percentage points. Logistics is another constraint. Disruptions in global shipping and border processes can reduce growth by up to 0.3 percentage points and add further pressure to inflation.
The agenda is clear. Countries need to diversify energy sources, expand local and regional fertilizer production, improve logistics, and strengthen trade infrastructure. These measures would reduce exposure to external disruptions while helping maintain production when global markets come under stress.
This is an opportunity for the region to position itself as a safe and reliable supply‑chain partner in global markets — from agriculture to critical minerals. Moving up the value chain can support growth, strengthen resilience, and create jobs.
The IDB Group is supporting this agenda through financing, credit lines, and investment platforms that help countries and firms secure key inputs — including fertilizers, energy, and oil derivatives; maintain production; and invest in long-term energy, agriculture, and infrastructure projects.
Looking Ahead
For Latin America and the Caribbean, the challenge is to respond in ways that protect stability today while reducing vulnerability over time.
Shocks are not a choice, but we can choose how to respond and prepare for future events.
The priority must be to protect the vulnerable, maintain discipline, and strengthen the supply of key goods.
At the IDB Group, we are working closely with countries and partners across the multilateral system to turn today’s actions into tomorrow’s strengths. What matters is not just weathering this shock, but emerging from it stronger.
References:
1 Relative to January, the IMF’s April 2026 “World Economic Outlook” revised the 2026 growth forecast for Latin America and the Caribbean up by 0.1 percentage point, the only regional upward revision.
2 EMBI spreads widened in March, peaking in most countries on March 30, but by early May, they stood at about 25 basis points below pre-shock levels, on average (excluding Venezuela).